VAT Archives

Penalty provisions under MVAT Act, 2002

VAT

Penal provisions :

Penal provisions can be bifurcated in two parts, (i) express
penal provisions, and (ii) provisions which are not expressly stated to be penal
provisions, but the nature of provisions operating as penal provisions.

Let us take the second part first. In this category the
following important provisions can be mentioned.

1. Assessment — S. 23(1) :

This Section reads as under :

“23. Assessment : (1) Where a registered dealer fails to
file a return in respect of any period by the prescribed date, the
Commissioner may assess the dealer in respect of the said period to the best
of his judgment without serving a notice for assessment and without affording
an opportunity of being heard :

Provided that, if after the assessment order is passed, the
dealer submits the return for the said period along with evidence of payment
of tax due as per the return or submits evidence of return for the said period
having been filed before passing of the assessment order along with evidence
of payment of tax due as per the return, then the Commissioner shall cancel,
by order in writing, the said assessment order and after such cancellation,
the dealer may be assessed in respect of the said period under the other
provisions of this Section :

Provided further that, such cancellation shall be without
prejudice to any interest or penalty that may be levied in respect of the said
period :

Provided also that no order, under this sub-section, shall
be passed after three years from the end of the year containing the said
period.”

The Section is in the nature of penal action. Failure to file
return within prescribed time will invite this ex parte best judgment
order. Therefore, if after due date, return for relevant period is not available
on the file of the officer, he can pass best judgment assessment order raising
any demand. This order can be passed by him without giving any notice or hearing
opportunity to the concerned dealer. As per S. 85(2)(b-1), no appeal can lie
against such order. This order can be cancelled only if one approaches the
authority with proof of filing return and with proof of payment of tax admitted
in the return.

The harsh effect of this provision will be that even if the
dealer has filed return but it has not reached the file of the officer, an ex
parte action may take place. It may be noted that now returnwise assessment
is possible and therefore if a dealer is liable to file monthly returns, there
can be 12 such ex parte orders.

The Section will operate more harshly if the dealer is not in
a position to make the payment of admitted dues. For example, a dealer is liable
to pay Rs.1 lakh in the month of Feb. 2008. If he has not filed return, an ex
parte order can take place. In such an order, demand will be based on the
best judgment of the officer and the demand may be raised at, say, Rs.5 lakhs,
etc. Now the dealer can get this order cancelled by filing the return of Feb.
2008 and on showing proof of payment of Rs.1 lakh admitted in the return. If it
is not done, then recovery and other penal actions for Rs.5 lakhs can go on.
Thus a dealer, who is not in good financial position to make payment of admitted
dues, will suffer the most. The only escape route will be to file the return in
time and apply for instalments. Before due date, filing of return without
payment is possible, but once the order u/s.23(1) is passed for non-filing of
return in time, the same order will get cancelled only on making payment of
admitted dues. Thus filing of return within due date is now an onerous duty on
the dealers.

The passing of order under this Section can be said to be a
completed assessment and the dealer cannot be assessed under other provisions
for the period covered by the said order till such order is cancelled. Upon
cancellation a dealer can be assessed under other regular provisions.

The time limit for passing the order under this Section is 3
years from the end of the year containing the period for which such order is to
be passed. For example, the time limit for passing ex parte order
u/s.23(1) for Feb. 2008 return will be March 2011.

The above provision appears to be against principles of
natural justice. It is giving unrestricted powers in the hands of the officers.

2. Classification of turnover — S. 28 :

This is one more Section not specifically stated to be penal
in nature, but operating as penal Section. The text of the Section is as under :

“28. Classification of turnover:- Where any Court or
Tribunal or any Appellate authority or any other authority passes an order in
appeal or review to the effect that any tax assessed under this Act or any
other Act should have been assessed under the provisions of a law other than
that under which it was assessed, then in consequence of such order, such
turnover or part thereof may be assessed to tax at any time within five years
from the date of such order, and where any assessment has already been made,
the assessment shall be modified after giving the dealer a reasonable
opportunity of being heard, notwithstanding that any provision regarding
limitation applies to such assessment period.”

This Section operates very harshly and practically the
benefit of litigating the matter for long gets vanished. In other words, the
Section seems to give premium on the inefficiency of the officers.

The working of this Section can be seen with an example. Suppose a dealer is assessed under the VATAct for certain turnover. The dealer litigates the matter and claims that the said turnover cannot be liable to tax under VAT.The Appellate authority including the High Court and the Supreme Court may accept the contention and may hold that the turnover is not liable under the VAT Act. Now at this juncture the Department can assess such turnover under any other relevant Act. For example, if turnover is to be assessed under the CST Act the Department can assess the dealer under the CST Act within 5 years from date of such appeal order. The above assessment will be without restriction of limitation provisions. For example, even after 30 years, the order under other Act can be passed, irrespective of the fact that the limitation to pass or modify the order under such other Act is already over.

The Section is to operate when the Appellate authority decides that the turnover should have been taxed under other Act, than the one under which it has been actually assessed. If appeal is under VAT Act it is difficult to anticipate how any Appellate authority will be able to make order relating to other Act. The Appellate authority may be able to say that the turnover is wrongly held liable under the VAT Act. However, if it directs to assess the turnover under some other Act like the CST Act, it will perhaps be without jurisdiction. Also if corresponding provisions under other Act are not in confirmity with the provisions of above S. 28, then the limitation as per such other Act should remain applicable. Though the intention of the Section is to cover the turnover under some other relevant Act, because of above requirement of order from the Appellate authority, etc., in our opinion, practically the section will have limited application.

3. Adjustment of payment:

One more silent penal provision is about adjustment of payment. Under the erstwhile BST Act the law was that any payment made towards dues as per any order was first to be adjusted against tax dues and balance towards interest, penalties, etc. Now the law is changed and a provision similar to ‘pathani vyaj’ is created. S. 40 reads as under:

“40. Adjustment of any payment :- Any payment made by a dealer or person in respect of any period towards any amount due as per any order passed under the Act shall first be adjusted, ex-cept insofar as the recovery of the said amount or part thereof is stayed U Iss.(6) of S. 26, against the interest payable by him on the date of payment in respect of the said period and thereafter towards the amounts due as a penalty, sum for-feited and fine. Any amount remaining unadjusted shall then be adjusted towards the tax payable in respect of that period.”

As per this Section any payment against dues created by any order, will first be adjusted towards interest, then penalties and the balance, if any, towards tax. Thus the person will run the post-order interest till he pays out entire amount of the order. It seems the Government’s thinking is now more on the commercial basis rather than a fiscal statute to collect tax. Such treatment deserves strong objection. It is necessary that the law is amended at the earliest to save dealers from such humiliating provisions.

4. Set-off – S. 48(5) :

This Section relates to set-off. The Section reads as under:

“48. Set-off, refund, etc. :

(1)–

(2)–

(3)–

(4)–

(5) For the removal of doubt it is hereby declared that, in no case the amount of set-off or refund on any purchase of goods shall exceed the amount of tax in respect of the same goods, actually paid, if any, under this Act or any earlier law, into the Government treasury except to the extent where purchase tax is payable by the claimant dealer on the purchase of the said goods effected by him :

Provided that, where tax levied or leviable under this Act or any earlier law is deferred or is deferrable under any Package Scheme of Incentives implemented by the State Government, then the tax shall be deemed to have been received in the Government Treasury for the purposes of this sub-section. “

Though the intention of this Section is to protect the revenue loss, the same will hit innocent purchasing dealers very gravely. Though the purchasing dealer might have paid tax to his vendor, the failure of the vendor to discharge his liability to Government will disentitle the purchasing dealer from claiming set-off. This will happen without any defence or protection to the purchasing dealer.

In normal course, the purchasing dealer will claim set-off in the period in which he has affected the purchases. But the set-off so claimed will get disallowed if the Sales Tax Department proves that the vendor has not paid the tax on his sale of goods. What we fail to appreciate is that the Government has all the machinery to collect the money from defaulter. The Government can utilise its powers, including prosecution, etc. to recover the tax from that defaulting dealer who has sold the goods, issued tax invoice, collected tax, but has not depos-ited the same into the Government Treasury. However without performing its duty, just on very prima facie case of non-payment of tax by the vendor, if set-off is disallowed to purchasing dealer, then it will cause great injustice to the purchasing dealer. For inefficiency of the Department the purchasingdealer will have to suffer. It may be noted here that there is no machinery available to the purchasing dealer to check whether the vendor has made payment of his taxes or not. Thus the Section operates without any defence in the hands of the purchasing dealer. Under VAT,every dealer will be claiming set-off of taxes paid on his purchases and even one single weak link in the chain may disentitle set-off to every succeeding purchasing dealer.

5. Agreements to be void – S. 57:

This is one more mischievous Section under the VAT Act. The Section reads as under:

“57. Agreement to defeat the intention and application of the Act to be void: (1) If the Commissioner is satisfied that an arrangement has been entered into between two or more persons or dealers to defeat the application or purposes of this Act or any provision of this Act, then the Commissioner may by order declare the arrangement to be null and void as regards the application and purposes of this Act. He may, by the said order, provide for increase or decrease in the amount of tax payable by any person or dealer who is affected by the arrangement whether or not such dealer or person is a party to the arrangement, in such manner as the Commissioner considers appropriate so as to counteract any tax advantage obtained by that dealer from or under the arrangement.

(2) For the purposes of this Section,

(i) ‘arrangement’ includes any contract, agreement, plan or understanding, whether enforceable in law or not, and all steps and transactions by which the arrangement is sought to be carried into effect;

(i) ‘tax advantage’ includes,-

(a) any reduction in the liability of any dealer to pay tax,

(b) any increase in the entitlement of any dealer to claim set-off or refund,

(3) Before passing any order under this Section, the Commissioner shall afford a reasonable opportunity of being heard to any such person or dealer whose tax advantage is sought to be counteracted.”

It means now the Department has unrestricted powers to go beyond the agreements and to declare them void.

Although, the practical implications of this Section are yet to be seen, however, there are fears that Departmental officers may interfere in the normal sale/purchase transactions and in spite of the fact that the dealer has charged correct price as per his policy, the officer may take action to enhance the same by substituting the said price, using above powers. The Section does not speak of any proof before initiating action under this Section. It only speaks of reasonable opportunity of hearing. So even on mere suspicion an officer may give hearing and after such empty formality, pass an order enhancing the tax liability. The Section should have been with burden of providing contrary proof by the Department before initiating the provisions of this Section.

6. Assessment proceedings, etc. not to be invalid on certain grounds – S. 62 :

This is one more Section safeguarding the inefficiency of Department. The Section reads as under:

“62. Assessment proceedings, etc., not to be invalid on certain grounds:
(1) No assessment (including review, appeal, rectification, penalty and forfeiture, notice, summons or other proceedings furnished, made or issued or taken or purported to have been furnished, made or issued or taken in pursu-ance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such assessment, notice, sum-mons or other proceedings, if such assess-ment, notice, summons or other proceedings are, in substance and effect in conformity with or according to the intent, purposes and re-quirements of this Act.

(2) The service of any notice, order or communication shall not be called in question, if the said notice, order or communication, as the case may be, has already been acted upon by the dealer or person to whom it is issued or which service has not been called in question at or in the earlier proceedings commenced, continued or finalised pursuant to such notice, order or communication.

(3) No order, including an order of assessment, review, appeal or rectification, penalty or for-feiture passed under the provisions of this Act shall be invalid merely on the ground that the action could also have been taken by any other authority under any other provisions of this Act.”

The text of the Section is sufficient to draw a conclusion that no responsibility is kept on the officer. He may take action in any way or serve notice the way he likes, no invalidity in order will take place. Up till today, any such deficiency is considered as nullifying the resultant order and there are number of judgments on this count. A reference can be made to judgment in the cases of CIT v. Bhushan Mallick, (55 CTR 73) (Cal.) and Kiran Oil Mills (S.A. 508 of 95 & 537 of 97 dated 31-5-2003), wherein defect in notice is considered as sufficient to declare the or-der as invalid. Similar is the position in respect of service of notice, especially when it is the case of revision, reassessment, etc. Reference can be made to the judgments in case of Prakash Electronics (S.A. 642 & 643 of 1995, dated 12-6-1998) and Zakaria Karim & Brothers (S.A. 68 of 1997, dated 9-10-1998).

However all this has been set at naught. This Section may be misused and in case of genuine injustice also, the dealer will not be able to come out of the clutches of this Section.

Above few provisions are illustrative of how penal provisions have been silently enacted without mentioning them as penal provisions.

BCAJ Admin

Penalty provisions under MVAT Act, 2002

VAT

Penal provisions : (Part-2)

(Part-1 published in the November issue of BCAJ)

Express penal provisions :

The express penal provisions are those which are specifically
so stated in the VAT Act. A brief summary of these provisions is as under :

Penalties — S. 29 :

S. 29 of the VAT Act provides for different types of
penalties. There are several sub-sections providing for levy of penalty. However
there are certain common provisions applicable to the above sub-sections. It
will be better if these common provisions are discussed first and then the
individual sub-sections can be discussed separately.

S. 29(11) :

This sub-section reads as under :

“(11) No order levying penalty under the foregoing
provisions of this Section shall be passed in respect of any period after
five years from the end of the year containing the said period :”

This sub-section lays down time limit, viz., 5 years
from the end of year, containing the period for which penalty is to be levied.
Thus, if penalty is to be levied for return period of February 2006, the time
limit will be March 2011.

A question will arise in cases where new actions are
initiated, like review, within their respective time limits. In such orders
penalty can be levied. It appears that even if such new action may be within the
time, the penalty can be levied in such proceedings only if it is within the
time limit of above 5 years.

S. 29(12) :

The Section reads as under :

“(12) No order imposing a penalty under any of the
foregoing sub-sections shall be made, —

(a) by a Sales Tax Officer or an Assistant Commissioner
where the penalty exceeds rupees five lakh except with the prior approval of
the Deputy Commissioner;

(b) by a Deputy Commissioner or a Senior Deputy
Commissioner, where the penalty exceeds rupees ten lakh except with the
prior approval of the Joint Commissioner :

Provided that nothing in this sub-section shall apply to
any penalty which may be imposed by an appellate authority.”

The Section is self-explanatory. The procedure for obtaining
approval is not given and whether the dealer will get hearing before such
approval is also not clear.

However the proviso makes it very clear that the appellate
authorities will not require any such permission.

The intention behind such a system of prior approval seems to
be to have some control over lower authorities. An incidental issue, which may
arise is whether the first appellate authority like the Deputy Commissioner or
Joint Commissioner (Appeals) will be able to give relief in case of appeal
relating to such penalty ? Since the penalty would be levied with approval of an
officer of equal rank, it is possible that such appellate authorities may drag
cold feet and may not tinker with the penalty order.

S. 29(13) :

The Section reads as under :

“(13) For the purposes of this Section, Commissioner
includes any appellate authority appointed or constituted under this Act.”

Thus the Section does away with the controversy
arising under the BST Act, 1959. The dispute lingered long under the BST Act, as
to whether Commissioner includes appellate authority or not. Now due to above
specific provision the confusion is clear and Commissioner will include
appellate authorities.

In other words, appellate authorities including the Tribunal
will get jurisdiction to levy penalty even while passing appeal orders.

One more common feature of penalty provisions u/s.29(3) to
u/s.29(9)(c) is that there is no discretion about the quantum. The penalty
amount/s have already been provided in the Section itself. However, there is
another view, according to which despite of fixed amount provided in the
Section, the authorities can levy lesser amount depending upon facts of the
case. It will be a matter of interpretation. The sales tax authorities may take
a view that the amount is fixed. Accordingly the issue before authorities will
be to decide whether to levy penalty or not. Once decided to levy, a fixed sum
may be levied.

It may be a matter of debate whether the penalties should be
of fixed amount or not ? The argument of the Department is that it will reduce
corruption as fixed amount is to be levied, there is no discretion. But dealers
fear that this will increase corruption at the stage of initiation of penalty.

S. 29(3) :

The levy S. 29(3) reads as under :

“(3) While or after passing any order under this Act, in
respect of any person or dealer, the Commissioner, on noticing or being
brought to his notice, that such person or dealer has concealed the
particulars or has knowingly furnished inaccurate particulars of any
transaction liable to tax or has concealed or has knowingly mis-classified any
transaction liable to tax or has knowingly claimed set-off in excess of what
is due to him, the Commissioner may, after giving the person or dealer a
reasonable opportunity of being heard, by order in writing, impose upon him,
in addition to any tax due from him, a penalty equal to the amount of tax
found due as a result of any of the aforesaid acts of commission or omission.”

The ingredients are clear. The concealment of transaction
liable to tax, knowingly misclassifying the turnover or knowingly claiming
excess set-off will be ground for levy of penalty under this Section. Words like
‘concealment’ and ‘knowingly’, sufficiently provide that the Department should
prove the mens rea before levying penalty.

The order levying this penalty can be made while passing an order or even after passing any order. The action can be taken on suo motu findings or on the findings brought to his notice. Who can bring to notice is not clarified and hence even an outsider can bring to the notice of officer and the penalty action can be initiated.

The Section envisages hearing opportunity and passing of written order for levying penalty.

The quantum of penalty will be equal to tax found payable because of the above acts of commission or omission.

S. 29(4):

The Section reads as under :

“(4) Where any person or dealer has knowingly issued or produced any document including a false bill, cash memorandum, voucher, declaration or ‘certificate by reason of which any transaction of sale or purchase effected by him or any other person or dealer is not liable to be taxed or is liable to be taxed at a reduced rate or incorrect set-off is liable to be claimed on such transaction, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him in addition to any tax payable by him, a penalty equal to the amount of tax found due as a result of any of the afore-said acts of commission or omission.”

The ‘Section’ envisages levy of penalty equal to tax amount found due as a result of the acts of commission or omission given in the above Section. The acts are about issue or production of false bill, voucher, declarations, etc. by which the tax payable is avoided or resulting in excess set-off. The other ingredients of the Section are same as above i.e., the order should be after hearing opportunity and be in writing. The mens rea clause applies here also as the provision speaks of acts of commission and omission knowingly.

S. 29(5):

This Section is inserted from 20-6-2006 :

“(5) Where a dealer has sold any goods and the sale is exempt, fully or partly, from payment of tax by virtue of any provision contained in Ss.(3), Ss.(3A), Ss.(3B) or Ss.(5) of S. 8, and the purchaser fails to comply with the conditions or restrictions subject to which the exemption is granted, then the Commissioner may, after giving the said purchaser a reasonable opportunity of being heard, impose penalty on him equal to one and a half times the tax which would have become payable on the sale if the said exemption was not avail-able on the said sale.”

The Government is empowered to provide concessional rate of tax for particular class of dealers by issue of Notification ul s.8(3), u/’ s.8(3A), u/ s. 8(3B) and ul s.8(5). The class of dealers so specified can effect purchases at 4% even though otherwise the goods are liable @ 12.5%. The Government has issued such Notifications under above Sections and allowed concessional rate to organisations like electric power generating company, etc. Now this penalty is provided if the dealer purchases the goods by utilising concession provided ul s.8(5) and fails to comply with the conditions of such concessional rate. The quantum of penalty is one and half time of the concession availed. There is no levy of purchase tax, which used to be there under the BST Act in case of contravention. Under the MVAT Act the Government intends to compensate for loss of revenue due to unauthorised use of concession by levy of penalty at the above quantum. Of course, it being a penalty, the normal defence available to the dealer viz., absence of mens rea, etc. will remain applicable here also.

29(6) :

The Section reads as under:

“(6) Where, any person or dealer contravenes the provision of S. 86, so as to have the quantum of tax payable by him to be under-assessed, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him a penalty equal to half the amount of tax which would have been under-assessed or one hundred rupees, whichever is more.”

The provisions of S. 29(6) apply when there is contravention of provisions of S. 86. S. 86 is about tax invoice and other bills, cash memorandum, etc. The quantum of penalty is linked with under-assessment because of non-compliance of invoice provisions and the same will be 50% of the said under-assessment. It is necessary to note that the words ‘knowingly’, etc. are missing here and hence it appears that the principles of mens rea will not apply here. However ultimately it being a penalty provision the mens rea indirectly creeps in as observed by the Supreme Court in case of Hindustan Steel Ltd. (25 STC 211).

29(7):

The Section reads as under :

“(7) Where, any person or dealer has failed without reasonable cause to comply with any notice in respect of any proceedings, the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him, a penalty equal to Rs.1000.”

It provides for levy of penalty for non-compliance of any notice, etc. without reasonable cause. The amount is Rs.1000. The penalty, in my opinion, applies, qua each proceedings and not multiple number of notices within one proceedings.

S. 29(8):

The Section reads as under :

“(8) Where, any person or dealer has failed without reasonable cause to file within the prescribed time, a return for any period as provided u/s.20, (…. ) the Commissioner may, after giving the person or dealer a reasonable opportunity of being heard, by order in writing, impose on him, in addition to any tax payable by him, a sum of rupees ten thousand by way of penalty. Such penalty shall be without prejudice to any other penalty, which may be imposed under this Act:

Provided that, if the return is filed before the initiation of the proceeding for levy of penalty, the penalty shall be levied at rupees five thousand and in any other case, the penalty shall be levied at rupees ten thousand.”

The Section is resembling to S. 36(4A), etc. under the BST Act, 1959. It speaks about levy of penalty if return is not filed within stipulated period. The penalty will be Rs.10000. However if return is not filed within permissible period, but it is filed before any action is initiated under the above S. 29(8), the penalty will be at Rs.5000.

Since a fixed sum of Rs.10000 and 5000 is prescribed, it appears that the penalty is contemplated for each act of default. However, depending upon the situation of filing, the penalty amount will vary i.e., it may be Rs.10000 or Rs.5000. Only if the dealer proves reasonable cause for default, the penalty may not be levied, else it will become a routine in each case.

S. 29(9)(c) :

The Section reads as under:

“(9)(c) Where a dealer has filed a return and such return is found to be not complete and self-consistent, then the Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose on him, by order in writing, a penalty of rupees one thousand. The levy of penalty shall be without prejudice to any other penalty which may be imposed under this Act.”

The penalty under this Section gets attracted where the dealer fails to file complete and self-consistent return. The complete and self-consistent return is to be seen in light of S. 20(1)(b)and Rule 20 of the VAT Rules.

The above provisions provide for correcting return within one month of serving of defect memo and if one fails to carry out the said corrections, penalty u/s.29(9)(c) at Rs.1000will be attracted.

S. 29(10):

The Section reads as under:

“(10) Where a person or dealer has collected any sum by way of tax in contravention of the provisions of S. 60, –

a) he shall be liable to pay a penalty not exceeding two thousand rupees, and

b) in addition, any sum collected by the person or dealer in contravention of S. 60shall be for-feited to the State Government.

If the Commissioner, in the course of any proceeding under this Act or otherwise, has reasons to believe that any person has become liable to a penalty or forfeiture or both penalty and forfeiture of any sum under this sub-section, he may serve on such person a notice in the prescribed form requiring him on a date and at a place specified in the notice to attend and show cause why a penalty or forfeiture or both penalty and forfeiture of any sum as provided in this sub-section should not be imposed on him. The Commissioner shall thereupon hold an inquiry and shall make such order as he thinks fit. When any order of forfeiture is made, the Commissioner shall publish or cause to be published a notice thereof for the information of the persons concerned giving such details and in such manner as may be prescribed.”

The above penalty is about forfeiture of excess collection of tax. The Section provides for forfeiture as well as penalty for the same. This is the only Section where the penalty is provided as not exceeding Rs.2000, i.e., the authorities can levy penalty as per their discretion from Re.1 to Rs.2000.The other procedure of forfeiture is the same as it was under the BSTAct, 1959.The officer has to issue a notice for the purpose of forfeiture of tax. S. 60 provides the mode of determining the excess collection,hence reference is required to be made to the said Section for correctly knowing the scope of forfeiture. If for-feiture is made, the details of the same should be published in the format given in Rule 39.

BCAJ Admin

MANDATORY PAYMENT FOR FILING APPEAL AND ESCAPE THEREFROM

INTRODUCTION

Laws are being so drafted nowadays that even for
preferring an appeal against an order passed by Revenue authorities the
aggrieved assessee has to shell out a minimum 10% or maybe even a higher
proportion of the dues.

In other words, the law makes it compulsory that
for filing / entertaining an appeal, the appellant must pay a minimum amount
upfront.

For example, under the MVAT Act payment of 10% of
tax dues has been made compulsory from 15^th April, 2017. Although
litigation on the said issue is on before the Hon. Bombay High Court, but as of
today no appeal is being admitted without payment of minimum 10% of tax dues.

Recently, the above issue has been dealt with by
the Hon. Supreme Court in the case of Tecnimont Pvt. Ltd. vs. State of
Punjab (67 GSTR 193)(SC).

FACTS OF THE CASE

The case arose from an order and judgment of the
Punjab and Haryana High Court. Under the Punjab Value Added Tax Act, 2005 (PVAT
Act), payment of 25% of additional demand was mandatory for entertaining an
appeal. This was challenged before the High Court.

The following questions arose before the Hon.
Punjab & Haryana High Court while deciding the case of Punjab State
Power Corporation Ltd. vs. State of Punjab (90 VST 66)(P&H):

‘(a) Whether the State is empowered to enact
section 62(5) of the PVAT Act?

(b) Whether the condition of 25% pre-deposit for
hearing first appeal is onerous, harsh, unreasonable and, therefore, violative
of Article 14 of the Constitution of India?

(c) Whether the first appellate authority in its
right to hear appeal has inherent powers to grant interim protection against
imposition of such a condition for hearing of appeals on merits?’

The Court decided the first two issues in favour of
the State, i.e., the State is empowered to make the provision as it has done
and that the provision is not in violation of Article 14 of the Constitution.

However, regarding the third issue, i.e., whether
the appellate authority is empowered to use its discretion for a lower amount,
the Hon. Punjab & Haryana High Court held in the affirmative, observing as
under:

‘It is, thus, concluded that even when no express
power has been conferred on the first appellate authority to pass an order of
interim injunction / protection, in our opinion, by necessary implication and
intendment in view of various pronouncements and legal proposition expounded
above, and in the interest of justice, it would essentially be held that the
power to grant interim injunction / protection is embedded in section 62(5) of
the PVAT Act. Instead of rushing to the High Court under Article 226 of the
Constitution of India, the grievance can be remedied at the stage of first
appellate authority. As a sequel, it would follow that the provisions of
section 62(5) of the PVAT Act are directory in nature, meaning thereby that the
first appellate authority is empowered to partially or completely waive the
condition of pre-deposit contained therein in the given facts and
circumstances. It is not to be exercised in a routine way or as a matter of
course in view of the special nature of taxation and revenue laws. Only when a
strong prima facie case is made out will the first appellate authority
consider whether to grant interim protection / injunction or not. Partial or
complete waiver will be granted only in deserving and appropriate cases where
the first appellate authority is satisfied that the entire purpose of the
appeal will be frustrated or rendered nugatory by allowing the condition of
pre-deposit to continue as a condition precedent to the hearing of the appeal
before it.

Therefore, the power to grant interim protection /
injunction by the first appellate authority in appropriate cases in case of
undue hardship is legal and valid. As a result, question (c) posed is answered
accordingly.’

The above judgment was challenged by the State on
the issue of the answer to question (c) and by the assessee in respect of the
answers to the first two questions.

The Hon. Supreme Court decided the issue under Tecnimont
Pvt. Ltd. vs. State of Punjab (67 GSTR 193)(SC).

CONSIDERATION BY SUPREME COURT

In its judgment, the Supreme Court referred to
various precedents on the issue. The indicative observations of the Supreme
Court can be noted as under:

‘15. In Har Devi Asnani 11 the
validity of proviso to section 65(1) of the Rajasthan Stamp Act, 1998
came up for consideration in terms of which no revision application could be
entertained unless it was accompanied by a satisfactory proof of the payment of
50% of the recoverable amount. Relying on the earlier decisions of this Court
including in Smt. P. Laxmi Devi the challenge was rejected and
the thought expressed in P. Laxmi Devi 10 was repeated in Har
Devi Asnani 11 as under:

“27. In Govt. of A.P. vs. P. Laxmi Devi 10 this
Court, while upholding the proviso to sub-section (1) of section 47-A of the Stamp Act introduced by the Andhra Pradesh Amendment Act 8
of 1998, observed (SCC p. 737, para 29):

29. In our opinion in this situation it is always
open to a party to file a writ petition challenging the exorbitant demand made
by the registering officer under the proviso to section 47-A alleging
that the determination made is arbitrary and / or based on extraneous
considerations, and in that case it is always open to the High Court, if it is
satisfied that the allegation is correct, to set aside such exorbitant demand
under the proviso to section 47-A of the Stamp Act by declaring the
demand arbitrary. It is well settled that arbitrariness violates Article 14 of
the Constitution (vide Maneka Gandhi vs. Union of India 17). Hence,
the party is not remediless in this situation.

…

28. In our view, therefore, the Learned Single
Judge should have examined the facts of the present case to find out whether
the determination of the value of the property purchased by the appellant and
the demand of additional stamp duty made from the appellant by the Additional
Collector were exorbitant so as to call for interference under Article 226 of
the Constitution.”

16. These decisions show that the following
statements of law in The Anant Mills Co. Ltd. have guided
subsequent decisions of this Court:

The right of appeal is the creature of a statute.
Without a statutory provision creating such a right the person aggrieved is not
entitled to file an appeal… It is permissible to enact a law that no appeal
shall lie against an order relating to an assessment of tax unless the tax had
been paid. It is open to the Legislature to impose an accompanying liability
upon a party upon whom legal right is conferred or to prescribe conditions for
the exercise of the right. Any requirement for the discharge of that liability
or the fulfilment of that condition in case the party concerned seeks to avail
of the said right is a valid piece of legislation…’

Observing as above, the Hon. Supreme Court upheld
the validity of two provisions.

In respect of question (c), that is, in spite of
such provisions, whether the appellate authority has discretion, the Hon.
Supreme Court observed as under:

‘18. It is true that in cases falling in second
category as set out in paragraph 11 hereinabove, where no discretion was
conferred by the Statute upon the appellate authority to grant relief against
requirement of pre-deposit, the challenge to the validity of the concerned
provision in each of those cases was rejected.

But the decision of the Constitution Bench of this
Court in Seth Nand Lal was in the backdrop of what this Court
considered to be meagre rate of the annual land tax payable. The decision in Shyam
Kishore attempted to find a solution and provide some succour in cases
involving extreme hardship but was well aware of the limitation. Same awareness
was expressed in P. Laxmi Devi and in Har
Devi Asnani and it was stated that in cases of extreme hardship a writ
petition could be an appropriate remedy. But in the present case the High Court
has gone a step further and found that the appellate authority would have
implied power to grant such solace, and for arriving at such conclusion,
reliance is placed on the decision of this Court in Kunhi 1.

19. Kunhi 1 undoubtedly laid down
that an express grant of statutory power carries with it, by necessary
implication, the authority to use all reasonable means to make such grant
effective. But can such incidental or implied power be drawn and invoked to
grant relief against requirement of pre-deposit when the statute in clear
mandate says no appeal be entertained unless 25% of the amount in question is
deposited? Would not any such exercise make the mandate of the provision of
pre-deposit nugatory and meaningless?

20. While dealing with the scope and width of
implied powers, the Constitution Bench of this Court in Matajog Dubey vs.
H.C. Bhari also touched upon the issue whether exercise of such power
can permit going against the express statutory provision inhibiting the
exercise of such power. The discussion was as under:

“Where a power is conferred or a duty imposed by
statute or otherwise, and there is nothing said expressly inhibiting the
exercise of the power or the performance of the duty by any limitations or
restrictions, it is reasonable to hold that it carries with it the power of
doing all such acts or employing such means as are reasonably necessary for
such execution. If in the exercise of the power or the performance of the
official duty, improper or unlawful obstruction or resistance is encountered,
there must be the right to use reasonable means to remove the obstruction or
overcome the resistance. This accords with common sense and does not seem
contrary to any principle of law. The true position is neatly stated thus in Broom’s
Legal Maxims, 10th Ed., at page 312: It is a rule that when the law
commands a thing to be done, it authorises the performance of whatever may be
necessary for executing its command.

(Emphasis added)”’

Relying upon the above precedents, the Hon. Supreme
Court held that once there is a specific provision, the appellate authority
cannot have discretion and cannot forgo such condition nor lower the amount.

AN ALTERNATIVE

The Hon. Supreme Court, while deciding the issue,
has also given a solution about cases where such condition cannot be complied
with. The said observations are available at many places and in precedents
reproduced by the Hon. Supreme Court.

In the paragraph reproduced above from the judgment
of Har Devi Asnani it can be seen that in case of exorbitant
demand, or in case of demand based on extraneous considerations, it is open to
approach the High Court under its inherent powers for deletion of such demand
as violative of Article 14.

The High Court can consider such a plea. Even in
the present case, the Hon. Supreme Court concluded as under:

‘25. As stated in P. Laxmi Devi and
Har Devi Asnani, in genuine cases of hardship recourse would
still be open to the concerned person. However, it would be a completely
different thing to say that the appellate authority itself can grant such
relief. As stated in Shyam Kishore, any such exercise would make
the provision itself unworkable and render the statutory intendment nugatory.’

Thus, an inference can be drawn that in case of
arbitrary demand one can approach the High Court by writ petition. It can also
be stated that in case of inability to pay the minimum amount, supported by
necessary documents and reasons, one can approach the High Court by writ
petition to waive the condition.

CONCLUSION

The law is now becoming very clear. Once there is a
condition of minimum payment, the appellate authority has no discretion in
spite of great prejudice to the assessee. However, if the circumstances exist,
the assessee can approach the High Court by way of writ petition to waive the
condition or set aside the demand itself.

As of today, the laws are
becoming mechanical and discretions are being done away with. The only hope for
justice will be from the Hon. High Courts in deserving cases.

shailesh.kwebmaker

PERSONAL RESPONSIBILITY OF DIRECTORS UNDER VAT / GST

INTRODUCTION

As per normal
understanding, the directors are not liable for any dues of the company.
Limited companies are basically formed to limit the financial liabilities to
the extent of the assets of the company. However, in spite of such a legal
position, an attempt is made by the authorities to cast liability on the
directors. Normally, directors of a public limited company are not covered for
personal recovery even by any specific provision. However, there may be
specific provisions for casting liability on the directors of a private limited
company. For example, under the Maharashtra Value Added Tax Act, 2002, section
44(6) provides for personal liability of directors of a private limited
company. The said section is reproduced below for ready reference:

‘(6) Subject
to the provisions of the Companies Act, 2013 (18 of 2013), where any tax or
other amount is recoverable under this Act from a private company, whether
existing or wound up or under liquidation, for any period, (but) cannot be
recoverable, for any reason whatsoever, then, every person who was a director
of the private company during such period shall be jointly and severally liable
for the payment of such tax or other amount unless he proves that the
non-recovery cannot be attributed to any gross neglect, misfeasance or breach
of duty on his part in relation to affairs of the said company.’

It can be seen
that the liability of the directors is not blanket but subject to conditions.
In other words, if the director proves that there was no gross negligence,
misfeasance or breach of any duty, then no liability can be attracted. However,
there is also a possibility that the Revenue may try to initiate recovery from
a director in spite of there being no such negligence, etc. on the part of the
director.

DECIDED CASES

There are a
number of judgements wherein the Hon’ble Courts have held that the corporate
veil cannot be lifted for recovery of tax dues unless there are specific
provisions. Reference can be made to the judgement of the Uttarakhand High
Court in the case of Jagteshwar Prasad Bansal & others vs. State of
Uttarakhand & others (59 GSTR 491) (Uttarakhand). In
this case, the sales tax department tried to recover dues from the directors of
the company, although in the relevant Uttarakhand Value Added Tax Act there was
no specific provision for recovery from a director. However, the department
wanted to lift the corporate veil. The High Court rejected the action of the
sales tax authorities. It held that unless there is any fraud or he / she is
guilty of misrepresentation, the corporate veil cannot be lifted. In the above
judgement, the Court has referred to an earlier judgement in the case of Meekin
Transmission Ltd. vs. State of Uttar Pradesh (58 VST 201) (All.) and
reproduced the following observations of the Allahabad High Court:

‘The legal
position as discerned from the above is that in a case where the corporate
personality has been obtained by certain individuals as a cloak or a mask to
prevent tax liability or to divert the public funds or to defraud public at
large or for some illegal purposes, etc., to find out as to who are those
beneficiaries who have proceeded to prevent such liability or to achieve an
impermissible objective by taking recourse to corporate personality, the veil
of the corporate personality shall be lifted so that those persons who are so
identified are made responsible. However, this doctrine is not to be applied as
a matter of course, in a routine manner and as a day-to-day affair so as to
recover the dues of a company, whenever and for whatever reason they are
unrecoverable, from the personal assets of the directors. If such a course is
permitted, it would lead to not only disastrous results but would also destroy
completely the concept of juristic personality conferred by various statutes
like the Act in the present case and would make several enactments and their
effect to be redundant and illusory.

Moreover, the
shallowness of arguments in favour of making directors personally responsible
can be considered from another angle. In every case the director may not be a
shareholder of the company. He may have been appointed as director for taking
advantage of his expertise in his field of vocation or profession, and for
achieving goals for which the company is incorporated. Such director is paid
remuneration, if any, for the services he rendered. Otherwise he is not at all
a beneficiary of the business or trade, etc., as the case may be, in which the
company is engaged. Such benefit would be available only to the shareholders as
they would only be entitled to share the profits earned by the company in the
form of dividends as decided by the Board of Directors. In such case such
director, though an agent of the company, he is more in the nature of an
officer of the company and not in the capacity of limited ownership by way of
shareholding. Such a director, in our view, unless guilty of misfeasance, fraud
or acting ultra vires, we are not able to understand
as to how he can be made responsible personally for the dues of the company even
if we apply the doctrine of piercing the veil.

If in such a
case the veil is to be lifted, the persons behind the veil, at the best, would
be the promoters of the company or those who have sought to obtain corporate
personality as a sham or bogus transaction. Similarly, in some of the companies
the financial institutions, who advance funds as loan, etc., nominate their
director/s to keep some kind of monitoring over the functions of the company so
that it may not go in liquidation on account of negligent and careless function
of the Board of Directors. Such directors also, in our view, cannot be included
in the category of the persons who would be responsible personally for the dues
of
the company.

In order to
find out as to who are the persons responsible personally when the veil is
lifted it would be wholly irrelevant as to whether such person is a director or
a promoter shareholder or otherwise of the company since the purpose of lifting
the veil is to find out the person/s who is operating behind the corporate
personality for his personal gain. Such person may be an individual or group of
persons belonging to a family or relatives or otherwise a small group collected
with a common objective of achieving some illegal, immoral or improper purpose,
etc. So long as no investigation is made into various aspects, we are not able
to understand as to how and in what manner a director of a company can
straightway be proceeded (against) personally for recovering dues of a company
unless it is so provided by some provision of the statute.’

The
observations clearly show that unless there is fraud or deliberate misrepresentation,
the corporate veil cannot be lifted to make the directors personally liable.

In the above
judgement, there was no specific provision about recovery from the director of
a Pvt. Ltd. Co. However, even where there is specific provision about recovery
from a director of a Pvt. Ltd. Co., like section 44(6) of the MVAT Act
reproduced above, still recovery is subject to proving negligence, etc. In
other words, the said provision is also in the nature of lifting the corporate
veil. The observations made above will equally apply in case of a specific
provision also.

In view of the
above legal position it can be inferred that whether there is specific
provision or not about recovery from directors, the recovery is subject to
positive involvement for dues by the director, like fraud, etc.

POSITION UNDER GST

Though the
above position is decided in light of the provisions under the VAT regime, the
ratio will equally apply under GST, too. Under GST, there is specific provision
for recovery from directors like section 89 that provides for liability of a
director. The section reads as under:

‘89. (1) Notwithstanding anything contained in the Companies Act,
2013, where any tax, interest or penalty due from a private company in respect
of any supply of goods or services or both for any period cannot be recovered,
then, every person who was a director of the private company during such period
shall, jointly and severally, be liable for the payment of such tax, interest
or penalty unless he proves that the non-recovery cannot be attributed to any
gross neglect, misfeasance or breach of duty on his part in relation to the
affairs of the company.’

Thus, the
provision is similar to section 44(6) of the MVAT Act. The issue of negligence,
etc. is also applicable under GST. The guidelines and observations mentioned in
earlier judgements will be useful for deciding cases under GST also.

CONCLUSION

Normally, limited companies are formed to restrict
personal liability. However, the laws are now being made to make the directors
personally liable. Though the said provisions are for safeguarding the revenue
in case directors play a fraud, the Revenue authorities try to apply them
summarily in all cases. It is expected that such specific provisions should be
applied only in specific cases, that also after observing principles of natural
justice and complying with requirements of the relevant section.

shailesh.kwebmaker

WORKS CONTRACT VIS-A-VIS VALUE OF TAXABLE TURNOVER

INTRODUCTION

The taxation of a works
contract under sales tax has been the subject of much debate in the pre-GST
era. The issues arising therefrom are manifold. One such issue is the valuation
of taxable turnover under a works contract.

A ‘Works Contract’ is a
composite contract involving both goods and labour. As per the statutory
provisions only value relating to goods can be taxed under sales tax laws. But
determining the value of goods has remained mired in controversy.

GOODS USED BUT NOT
GETTING TRANSFERRED

This is one of the issues
being hotly discussed. The case of Commissioner of Sales Tax vs.
Matushree Textiles Limited (132 STC 539)(Bom) is, amongst others, one
of the earliest judgements, laying down that even if goods are not getting
transferred physically but their effect gets transferred, it will be considered
a works contract.

In this case, dyes and
chemicals were used for dyeing of cloth. And one of the arguments was that
since the dyes /chemicals are washed away there is no transfer of property in
goods for it to become a part of a works contract.

But the Bombay High Court
turned down this argument, holding that even passing on of colour, in the form
of a colour shade on cloth, is transfer of property in goods, and thus it comes
under a works contract. However, valuation was not discussed in this judgement.

A case where the issue of valuation arose was that of Enviro
Chemicals vs. State of Kerala (39 VST 434)(Ker). The activity
involved here was the treatment of effluent water. The dealer used chemicals to
purify water and such purified water was then allowed to flow into a river. The
argument was that since there is no transfer of property to the employer in any
form, there is no taxable value as the use of materials is only as consumables.

The High Court, by a
majority, rejected the argument and held that the value of goods used, though
not actually transferred to the employer, is taxable.

In the recent case of A.P.
Processors vs. State of Haryana (57 GSTR 491)(P&H), the
facts relevant to the judgement are noted as under by the High Court:

“3. A few facts relevant
for the decision of the controversy involved as narrated in VATAP No. 32 of
2017 may be noticed. The appellant-assessee is a dealer duly registered under
the provisions of the Haryana Value Added Tax Act, 2003 (HVAT Act) and the
Central Sales Tax Act, 1956 (the CST Act). The assessee is a textile processor
and is engaged in the execution of job works. The grey fabric comes to the
processors and after due processing/manufacturing, the finished product is sent
back, raising an invoice on which Basic Excise Duty (BED) and Additional Excise
Duty (AED) is also leviable, although the rate of duty is nil, and as per the
valuation prescribed in the relevant Act considering the cost of grey fabric,
processing charges and other incidental charges, etc.

The assessing authority
concluded the assessment on the basis of observations and findings that all the
dyes and chemicals used in the execution of the job work of bleaching and
dyeing are transferred in physical form or as their inherent properties. Therefore,
the property in goods passed on in the process of execution of the job work
should be taxed; the assessing officer raised a tax demand of Rs. 5,34,516 vide
order dated 20.3.2007 (Annexure A.1). Reliance was placed on the decision of
the Bombay High Court in Commissioner of Sales Tax vs. Matushree Textiles
Limited, (2003) 132 STC 539.

Still not satisfied, the
assessee filed an appeal before the Tribunal, inter alia canvassing that
tax on value of chemicals consumed during the process of dyeing and job work
was not to be included for the purpose of levy of VAT under the HVAT Act/CST
Act. It was also argued that even the dye used in the process would not be
entirely taxable because a substantial portion of the same is not transferred
to the principal eventually. The assessee also submitted a book containing the
reports and technical certificates issued by various competent authorities
justifying the stand of the assessee that chemicals are wasted during the
process of dyeing of textiles and that only a part of the colour is made part
of the final product sent to the principal. Vide impugned order dated 17.3.2017
(Annexure A.5), the Tribunal dismissed the appeal upholding the levy of tax on
the entire value of the chemicals and dyes used in the process irrespective of
the fact whether property in goods had been transferred or not. Hence the
instant appeal by the appellant-assessee.”

The Hon’ble High Court
thereafter examined the process in detail. The processes like washing,
watering, dyeing and softening, etc. are carried out. After examining the scope
of such processes and the technical reports submitted on behalf of the
assessee, the Hon. High Court held as under:

“21. In other words, the
bleaching and dyeing is a multi-level process in which chemicals are used
initially and are mandatorily washed out before the cloth becomes conducive for
the process of dyeing. After undertaking dyeing, the fabric is sent to the
principal. Initially, the fabric indicates washing with the help of caustic
soda, desizer, soda ash, hydrogen peroxide, HCL, potassium permanganate, oxalic
acid, sodium sulphate and acetic acid. The said process would be akin to
washing clothes at home with the help of washing powder. The effect of washing
is to ensure that the portion of elements and dirt attached to the cloth is
removed before any further process is carried out. It was also claimed that in
this process, the weight of the cloth is reduced which shows that no chemical
gets stuck to the cloth. The property of such chemicals, if held to be absorbed
in the fabric and transferred, (is that) the fabric would not remain fit for
wearing. The dyeing work undertaken by the appellant on cotton fabrics
manufactured by them is the final act, but prior to this act of dyeing various
processes are undertaken for making the fabric fit for dyeing. The processes
normally undertaken are as follows: (1) desizing, (2) scouring, (3) bleaching,
(4) mercerizing and (5) dyeing and finishing.

While the textile
undergoes the aforesaid treatment, certain chemicals are used which are
consumables and which do not hold on to the cotton fabrics. After completion of
the aforesaid processes, dyeing is undertaken which holds on to the cotton
fabric giving a lasting impression and ultimately converts the grey fabric into
printed fabric, which is then marketed. In the act of dyeing, as also in
printing, certain amount of chemicals, dyes and colours are washed out and they
do not remain embedded on the textile or fabric. Thus, the benefit of
chemicals, dyes and colours which get washed out to this extent would be
extended to the assessee-appellant. In Gannon Dunkerley & Co. [AIR
1954 Mad 1130] it has been specifically laid down that while permitting
deductions, the consumables are required to be deducted from the total gross
turnover of an assessee for arriving at actual taxable turnover and the dyes
and chemicals in the present case, a certain percentage thereof being
consumables, are required to be excluded.

22. Thus, it would be
pertinent to observe that what is taxable under the HVAT and CST Act is the
value of the goods which get transferred to the customer in the execution of
the works contract either as goods or in any other form and not the value of
goods used or consumed in the execution of the works contract, if such user or
consumption does not result in transfer of property in those goods in any form
to the customer. The tax on the entire value of chemicals consumed during the
process of dyeing and job work are not to be included for the purpose of levy
of VAT as substantial portion of the same is not transferred to the principal
eventually.”

Thus, the Hon’ble High
court has arrived at the scope of consumables in relation to a works contract.
The judgement is laying down a sound principle though there are also some
contrary judgements. The actual extent of transfer of property depends upon the
facts of each case.

CONCLUSION

The judgement will be
useful for guiding the assessee /authorities in deciding the controversial
issue of valuation of goods for the purpose of levy of tax in works contracts.
The judgement will also apply to many such day-to-day transactions like laundry
activities or only cleaning activity, etc. It is expected that the assessee
will give technical / relevant data to determine the value and the authorities will
look at it in a fair and businesslike manner to avoid further disputes in all
such contracts executed up to 30^th June, 2017.

It may be noted that under
GST laws, w.e.f. 1^st July, 2017, such contracts are to be treated as
labour contracts. Thus, the entire value of transaction (including value of
material as well as services) shall be liable to tax as ‘service contract’ and
tax thereon shall be levied accordingly.

shailesh.kwebmaker

DUPLICATE PART OF C FORM, WHETHER VALID

Introduction

Under CST
Act, the vendor can sell the goods against C form to the buyer. The vendor is
depending upon buyer for getting the C form. As per Rules, there are three
identical parts in C form. The buyer retains counterpart with him. The two
parts marked as original and duplicate are given to vendor. The vendor is
required to produce the above two parts before his assessing authority for getting
the claim of sale against C form allowed.

India Agencies case

There the
controversy is about which part to be produced before the assessing authority.
The party, India Agencies, produced duplicate parts of C forms in its
assessment and they were disallowed on the ground that original parts are
required to be produced. The matter went to the Hon. Supreme Court which is
reported in case of India Agencies (139 STC 329)(SC). In this case,
Kerala (CST) Rules provided for production of original parts and on
non-production the claim was disallowed which was contested before the Hon.
Supreme Court. In above judgment the Hon. Supreme Court has rejected the claim
observing, amongst others, as under:-

“25. The
learned Senior Counsel for the appellant submitted that there is no suggestion
anywhere that there is anything wrong with the genuineness of the transaction
or any doubts as to the possession by the purchasing dealer on a certificate
enabling the sellers to obtain the concessional rate of tax under section 8 of
the Act.

Under such
circumstances, the authorities should not have taken the strict view in
rejecting the claim of the concessional rate of tax. At first sight, the
argument of the learned counsel for the appellant appears to be genuine and
acceptable but considering the mandatory nature of the provisions of the Act
and Rules, this Court is called upon to decide the questions involved in this
case. The provisions being mandatory they should have been complied with. The
appellant made no attempt to comply with rule 12(3) till after his claim was
rejected by the assessing authority. Having made no attempt to comply with the
mandatory provisions, he disentitled himself from getting the concessional
rate. Even otherwise, in our view, it is a pure question of law as to the
proper interpretation of the provisions of section 8 of the Central Sales Tax
Act and the provisions of rule 12 of the Central Sales Tax (Registration and
Turnover) Rules, 1957 and rule 6(b)(ii) of the Central Sales Tax (Karnataka) Rules,
1957. In view of the decision of this Court in the case of Kedarnath Jute
Manufacturing Co.* [1965] 3 SCR 626 and of the decision in Delhi Automobiles
(P) Ltd.† (1997) 10 SCC 486, it is clear that these provisions have to be
strictly construed and that unless there is strict compliance with the
provisions of the statute, the assessee was not entitled to the concessional
rate of tax.”

Based on
above judgment there are a number of Tribunal judgments in Maharashtra where
the claims are disallowed for non-production of original parts.

Recent judgment of the Hon. Madras High
Court in case The State of Tamil Nadu vs. TVL India Rosin Industries [Tax Case
(Revision) No.66 of 2017 dt.13.12.2017]

The Hon.
Madras High Court had an occasion to deal with similar issue. The facts in this
case are that the original parts were misplaced and in appeal, the claim was
allowed based on duplicate parts. The Tribunal confirmed the order of the first
appellate authority. Therefore, the State Government has filed revision before
the Hon. Madras High Court. Following questions were referred for the opinion
of the High Court.

“9. Being
aggrieved by the dismissal of the appeal in S.T.A.No.86 of 2011, dated 25/10/2013,
on the file of the Tamil Nadu Sales Tax Appellate Tribunal (Additional Bench),
Chennai, instant Tax Case Revision Petition is filed, on the following
substantial questions of law:-

1. Whether
on the facts and in the circumstances of the case, the Tribunal was right in
law in holding that duplicate Form F is sufficient for availing concessional
rate of tax?

2. Whether
on the facts and in the circumstances of the case, the Tribunal was right in
law in holding that though the decision reported in 83 STC 116 is related to C
Form, F Form also comes under CST Act?

3. Whether
on the facts and in the circumstances of the case, the Tribunal was right in
not considering the Rule 10 (2) of the CST Rule which prescribed, under which
circumstances duplicate forms can be accepted?

4. Whether
on the facts and in the circumstances of the case, the Tribunal was right in
not considering Rule 12 (2) and 12 (3) of the CST Rule which deals with the
procedure to be followed for obtaining duplicate forms in lieu of the original
declaration forms lost?

5. Whether
the Tribunal was right in ignoring the fact that the dealer while replying to
the pre-revision notice issued by the Assessing Officer, promised to file the
original form and requested extension of time for filing the same?”

The Hon.
Madras High Court referred to the arguments of the State Government i.e.
revisionist and also referred to various provisions applicable on above subject
under CST Act and Local Act.

In
particular arguments on behalf of State Government are noted as under:-

“17.
Though Ms. Narmadha Sampath, learned Special Government Pleader contended that
one of the conditions required to be satisfied by the purchasing dealer is that
the Forms should have been lost and that the purchasing dealer, ought to have
submitted an indemnity bond, in Form G to the notified authority, from whom the
said Form was obtained, for such sum and only in the event of satisfying the
above said requirement, the Assessing Authority can decide, as to whether such
duplicate/certificate, can be accepted or not, and further submitted that in
the case on hand, when purchasing dealer had failed to discharge the statutory
obligation, refusal to accept the duplicate forms, cannot be said to be
erroneous, we are not inclined to accept the said contention, for the simple
reason that the Assistant Commissioner (CT) Harbour 2, Assessment Circle, has
not passed orders, with the above said reasons.”

The Hon.
Madras High Court further observed as under while rejecting the revision filed
by the State Government.

“20.
Having regard to the Forms (Original, duplicate or counter foil) and placing
reliance on the decision rendered in Manganese Ore (India) Ltd Vs. Commissioner
of Sales, Tax, Madhya Pradesh, reported in {1991 (83) STC 116}, the Appellate
Deputy Commissioner (CT)-I, has passed the orders, stating that, there is
nothing wrong in filing duplicate forms, for availing concessional rate. The
Tamil Nadu Sales Tax Appellate Tribunal (Additional Bench), Chennai, has
referred to the Rules and accordingly, concurred with the views of the
appellate Authority.

21. Though
before the appellate Authority, contention has been made that submission of
original portion of Form, is mandatory for claiming concessional rate and that
there is every possibility of misuse of original Form, in some other
transaction, the said contention has been rejected. Form C (Rule 12 (1), is
issued by the State authority of the State. It also contains and name of the
person signing the declaration. Genuineness of the duplicate forms issued by
the authority of the other state to the purchaser-dealer is not disputed.
Revenue has not disputed that there was a inter-state sale and that a
certificate has been issued by the competent authority. Both the appellate
Deputy Commissioner (CT), Chennai, as well as the Tribunal had the opportunity
of perusing the duplicate forms. Assessee has relied on Manganese Ore Ltd’s
case and revenue has not placed any contra decision. On the facts and
circumstances of the instant case, the said judgment has persuasive value and
rightly applied.”

Thus, the
Hon. Madras High Court has taken a view, which will certainly give relief to
the litigants. It is nightmare to get the original of duplicate C forms from
the buyers. Under such circumstances, in genuine cases, the claim should remain
allowable against duplicate part of C form.

Although,
in this case the judgment of the Hon. Supreme Court in case of India Agencies
is not referred. But still the above judgment of the Hon. Madras High Court
based on provisions of CST Act will be helpful to the litigants.

Conclusion

The above judgment is really very useful and it is a judgment
contemplating good relief in case of loss of original parts of C forms. Since
it is judgment under CST Act, it should remain applicable in all States unless
there is contrary judgment of any jurisdictional High Court. It should also
remain applicable in Maharashtra. A line of clarification and confirmation
about acceptance of above judgment by the concerned authority of Maharashtra
State will be much useful to avoid unnecessary litigations.

shailesh.kwebmaker

ADDITIONAL GROUND IN APPEAL: WHEN PERMISSIBLE?

INTRODUCTION

Under tax
laws, remedies are provided against orders passed by lower authorities.
Normally, the remedy is either rectification or appeal. While rectification has
a limited scope because it is restricted to correction of apparent mistakes,
appeal has a very wide scope and is a useful right with the assessee. An
aggrieved assessee can file an appeal to the designated higher authority
against unfavourable order/s. Normally, there is also a scheme for filing a
second appeal before the Tribunal or such higher authorities as may be
prescribed.

However,
it may be noted that the rights to appeal are subject to certain conditions.
Generally, there are appeal forms which are to be filled up and in the same the
grounds about the issues raised in appeal are required to be mentioned. It is
expected that the assessee will take proper care while raising the grounds of
appeal. Under fiscal laws, the grounds can be amended or new grounds can be
added in the course of an appeal. If the matter is in first appeal, then the modification
/ addition of the grounds is normally not objected to. However, if the appeal
is before the Tribunal and if any new ground is to be raised, then the issue is
not that simple. The power of the Tribunal to allow the additional ground is
discretionary and it may allow it subject to its satisfaction.

RECENT CASE LAW

Recently, the Hon. Bombay High Court had occasion to deal with such an
issue in the case of Bombay Dyeing & Mfg. Co. Ltd. vs. the
Commissioner of Sales Tax (68 GSTR 58) (Bom.) under the BST Act. The
factual position involved is narrated by the High Court in the following words:

…..

‘7. When all the aforementioned four second
appeals were fixed for hearing, the applicant sought permission to raise an
additional ground relating to levy of sales tax on the surrender of Exim
Scrips. This additional ground was with reference to the second appeals that
were filed pertaining to the F.Y. 1995-96. The additional ground sought to be
raised was thus:

“That the
lower authorities have erred in levying sales tax on surrender of Exim Scrip
and therefore such levy be set aside in view of the judgement of the Hon’ble
Tribunal in the case of M/s Agra Engineering Works (Second Appeal No. 185
of 1997, dated 30/4/2002).”

8. It was submitted on behalf of the applicant
that since this is a pure question of law, it could be raised at any time in
the appeal proceedings and therefore the said additional ground be allowed to
be raised before the MSTT.

9. This was however vehemently opposed by the Revenue.
It was pointed out that this ground was never taken up either in the first
appellate proceedings or even in the grounds before the MSTT.

According
to the Revenue, the adjudication on this ground involved verification of the
relevant documents and therefore the said ground could not be allowed at such a
late stage of the proceedings.

10. Hearing the parties on this preliminary issue,
the MSTT opined that the applicant had not given any details of the particular
transactions, the levy in respect of which was now disputed through the
additional ground. It recorded that the assessment order for the period 1995-96
was also silent as regards whether any such transactions had been assessed to
tax. It was also not clear as to whether the transaction, if any, in respect of
the Exim Scrips constituted any surrender or sale. Having regard to these
facts, the MSTT agreed with the Revenue that adjudication in the context of
this ground would involve verification of relevant evidence so as to ascertain
the true nature of the transactions and therefore there was no case made out to
allow this additional ground to be raised at such a late stage. The MSTT
therefore declined to entertain the additional ground. Question (I) reproduced
by us earlier arises from this additional ground.’

…..

The above
matter came before the High Court by way of Sales Tax Reference. Long-drawn
arguments were made before the Court from both the sides. So far as the
assessee was concerned, it was submitted that the Tribunal is the last fact-finding
authority, and therefore it should have allowed the additional ground. It was
further submitted that the appellate powers under the BST Act are wide enough
to allow additional ground and even if additional evidence was required, still,
it could have been allowed.

Per contra,
on behalf of Revenue it was submitted that the additional ground sought to be
raised was not purely a question of law but was a mixed question of fact and
law and accordingly it was submitted that the rejection is justified.

The High
Court thereafter referred to the discussion by the Tribunal on the above ground
and came to a conclusion as follows:

…..

‘19. As
can be seen from the aforesaid paragraphs, the MSTT (third Bench) on a
consideration of all the relevant facts had taken a conscious decision not to
entertain the additional ground relating to levy of tax on the transactions of
Exim Scrips. Thereafter, the fourth Bench of the MSTT itself examined the files
for the relevant financial years. It perused the files submitted by the
applicant in the assessment proceedings which contain statements of sales /
purchase, declarations and other relevant documents like transport receipts,
sales bills, etc. On going through all these files, the fourth Bench of the
MSTT opined that they did not contain any documents to conclusively show that
the Exim Scrips were surrendered to the Government of India or the designated
bank. On the contrary, in the statements of sales, the said transactions of
Exim Scrips have been specifically shown to be “Exim Scrips sold.”

Even in
the assessment order, the transactions were categorically mentioned to be
“sale” of Exim Scrips. After examining all this material, the MSTT opined (in
the referral order) that it was beyond any doubt that the assessment records
did not contain any document to conclusively show that the impugned
transactions constituted surrender of Exim Scrips and which was the additional
ground that was sought to be raised by the applicant. In this view of the
matter, it was absolutely clear that the adjudication on the said point before
the MSTT would have certainly involved perusal, verification and appreciation
of additional evidence and that is why the MSTT declined to adjudicate the said
issue. This was for the simple reason that no material on this additional
ground was ever produced. Over and above this, the MSTT in paragraph 21
(reproduced above) also examined certain documents which the applicant had
claimed to have submitted in the assessment proceedings. On examining the documents
mentioned in paragraph 21, the MSTT found that, in fact, at least part of the
Exim Scrips were admittedly sold by the applicant to one M/s Agrawal Traders of
Bombay.

As far as
the contention of the applicant regarding surrender of Exim Scrips is concerned,
the MSTT opined that the documents submitted by the applicant in relation to
certain cheque receipt entries in support of the receipt of cheques from the
Joint DGFT, the MSTT was of the opinion that merely on the basis of these
documents, the claim of the applicant that the Exim Scrips were surrendered to
the Government could not have been legally allowable unless the other
supporting documents relating to the particular transactions were produced,
verified and appreciated. To put it in a nutshell, the MSTT was of the view
that the relevant documents available on record were not sufficient for
adjudication of the additional ground that was sought to be canvassed by the
applicant. It would have certainly required leading of additional evidence.

20. We find that the applicant never made any
application for leading any additional evidence to substantiate its claim that
the Exim Scrips were in fact surrendered to the Government and were not sold.
In fact, in the order of MSTT dated 8^th December, 2006 it was
specifically contended by the applicant that since the additional ground is a
pure question of law it could be raised at any time in the appeal proceedings
and therefore the MSTT ought to have entertained the additional ground. Having
found that the additional ground was not a pure question of law but required
additional documents and evidence which needed to be verified, produced and
appreciated, we do not think that the MSTT was unjustified in not entertaining
the additional ground regarding surrender of Exim Scrips. If the applicant did
not bring any material before the MSTT to substantiate its claim that it had
surrendered the Exim Scrips to the Government and therefore was not exigible to
tax, the MSTT necessarily could not have entertained the aforesaid ground as
there was no material brought on record to render a finding thereon.

In these
circumstances and peculiar to the facts of this case, we find that the MSTT was
legally justified in not adjudicating on the point regarding levy of tax on Exim
Scrips. In these circumstances, we have no hesitation in answering Question (I)
in the affirmative and against the applicant and in favour of the Revenue.’

…..

Thus, the rejection is justified by the High Court. From the above
observation it can be seen that if the additional ground is about a law point,
then allowability of the same is normal. However, if the issue involves factual
position, then it becomes discretionary and may require more persuasion.

CONCLUSION

Though the
above judgement is under the BST Act, the ratio will apply to other fiscal laws
also where the assessee wants to raise additional grounds before the appellate
authority. Amongst others, while trying to raise additional grounds it is
expected that the assessee will give all relevant material that is ready to
convince the appellate authority to allow the additional ground. Normally, care
should be taken to take the grounds with the appeal itself, but if at all a
situation arises for raising additional ground, then the assessee should take
more care to submit the relevant supporting ground along with the application.
The above judgement will be a useful guidance for future.

shailesh.kwebmaker

PRINCIPLES OF NATURAL JUSTICE VIS-À-VIS ASSESSMENT UNDER MVAT/CST ACTS

INTRODUCTION

Assessment under taxation laws is considered to be
a quasi-judicial process. The Department authorities are expected to act in a
just and fair manner, including compliance with the principles of natural
justice.

Not calling records lying with department

There are a number of instances where the
investigation authorities may visit the place of business of an assessee.
Through such a visit, the Department may acquire possession of full / part
records of the assessee. The assessing authorities subsequently initiate
assessment proceedings. And the burden is on the assessee to produce records.
But strangely, no action is taken to call for the records lying with the
investigation authorities!

Often, adverse orders are passed based on reports
received from investigation authorities, or based on (their) own assumptions
without going into the actual records with the authorities.

Judgement of the Bombay High Court in the case of Insta Exhibitions Pvt. Ltd. (Writ Petition No. 6751
of 2019 dated 8^th August, 2019)

One such case came before the Hon’ble Bombay High
Court recently. The facts narrated by the Court are as under:

‘3. The
grievance of the Petitioner is that both the impugned orders dated 14^th
March, 2019 have been passed in breach of principles of natural justice
inasmuch as no sufficient opportunity to present their case was given to the
Petitioner. In particular, it is pointed out that the Petitioner had received a
notice for personal hearing from the Assessing Officer for the hearing
scheduled on 11^th March, 2019. On that date, i.e. 11^th
March, 2019, the Petitioner’s representative attended the office of the
Assessing Officer and filed a letter seeking an adjournment of eight days and
the respondents were requested to make available to the Petitioner its own
documents relevant for the assessment relating to financial year 2014-2015,
which were with the Assistant Commissioner of Sales Tax, Investigation Branch,
Bhayander (evidence in the form of receipt was also enclosed with the
Petitioner’s letter dated 11^thMarch, 2019). The impugned orders do
record that the Petitioner’s representative was present at the hearing and the
filing of letter dated 11^th March, 2019. It is submitted that the
assessment were (sic) finalised without giving the Petitioner the
documents in the possession of the Revenue. Thus, the Petitioner did not have
an opportunity to establish its case before the authority.’

The respondents opposed the writ petition on
grounds of alternative remedy and also on the ground that the submission of the
assessee is otherwise considered.

However, the Bombay High Court did not approve of
the action of the Department authorities and observed as under:

‘5. It is an undisputed position that the
Petitioner’s documents relating to the period 2014-2015 and necessary for the
Petitioner’s assessment, in particular to support its claim for branch transfer
and exhibition activity, were in the possession of the Department with effect
from 18^th April, 2017. In spite of the Petitioner’s seeking copies
of the same, the same were not granted by the Assessing Officer as he did not
call for the necessary proceedings and papers from the Assistant Commissioner
of Sales Tax, Investigation Branch, Bhayander, who was in possession of the
papers relating to the assessment year 2014-15. In these circumstances, it was
impossible for the Petitioner to establish its claim for branch transfer as
also the exhibition activity as the documents relevant, according to the
Petitioner, in support of its aforesaid two claims, were amongst the documents
which were in the possession of the Assistant Commissioner of Sales Tax,
Investigation Branch, Bhayander. This non-giving of documents certainly
handicapped the Petitioner in the assessment proceedings. This certainly
amounts to a breach of principles of natural justice.

6. In the above view, there
is a flaw in the decision-making process which goes to the root of the matter.
Therefore, we set aside the impugned orders dated 14^th March, 2019
passed under the MVAT Act and the CST Act. We restore the Petitioner’s
assessment proceedings to respondent No. 3 – Deputy Commissioner of State Tax –
for fresh consideration of the assessment for the period 2014-15 after
furnishing to the Petitioner all the documents relating to the assessment year
2014-15 which are in possession of the Assistant Commissioner of Sales Tax,
Investigation Branch, Bhayander, since 18^th April, 2017.’

Thus, the Hon’ble High Court has remanded the
assessment for fresh orders after providing a proper opportunity to the
petitioner.

CONCLUSION

Compliance with the principles of natural justice
is a very important part of assessment. Non-compliance results in invalid
orders. However, the assessee is also required to be alert about his rights. It
is necessary that the issue about the requirement of following the principles
of natural justice is raised in due course. If not, then non-compliance will be
fatal to the validity of the orders passed. The above judgement will be useful
for reference in future proceedings.

shailesh.kwebmaker

Set Off vis-a-vis Gross Receipts for Rule 53(6)(B) of The MVAT Rules

Introduction

The grant of set off is
prerogative of the legislature. In other words, set off is not right of the
dealers. The set off is to be given as per Scheme, Rules and conditions
attached therewith.

Under MVAT Act, there is
broad scheme of granting set off including almost on all goods like Capital
goods, trading goods and expenses are eligible for set off. However, there are
certain conditions where set off can be reduced or it can be denied.

There is Rule 53(6)(b)
which has attracted long litigation. The rule is reproduced below for ready
reference.

“53. Reduction in
set-off

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.

(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, –

(b) in so far as the dealer
is not 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 from the date of effect of the
certificate of registration.

Explanation.-For the
purposes of this sub-rule, the “receipts” means the receipts pertaining to all
activities including business activities carried out in the State but does not
include the amount representing the value of the goods consigned not by way of
sales to another State to oneself or one’s agent.”

It can be seen that if the
receipts from sale are less than 50% of gross receipts, than set off is restricted
to the purchases which are sold within six months. If such condition is
applicable, then the dealer has to give the data about purchase and sale of
corresponding goods and then claim set off.

The major issue arises
about interpretation of “gross receipts”. One of the issues is what is the
scope of gross receipts?

Case of Mutual Funds

In case of Mutual Funds,
they run various different schemes. Separate accounts are kept for each scheme.
If receipts of all the schemes are considered then the mutual funds attract
above rule. However, if the scheme relating to particular commodity like gold
is considered separately then the above rule may not apply.

There was controversy about
the scope of gross receipt in relation to mutual fund i.e. whether to take
receipts from all the schemes to compute the gross receipts or to take only
receipts of each scheme. The matter has reached to Hon. Bombay High Court in
case of Axis Mutual Fund (WP No. 710 of 2018 dt.6.8.2018).

The brief facts narrated by
Hon. Bombay High Court are reproduced below.

“3. By the Deed of Trust dated 27.06.2009 made by
and between Axis Bank Limited, a settlor, and Axis Mutual Fund Trustee Company
Limited, trustee, an irrevocable trust/trusts called Axis Mutual Fund was
created.

4. Axis Mutual Fund Trustee Company Limited
(“Trustee Company”), incorporated under the provisions of the Companies Act,
1956, was approved by Securities and Exchange Board of India (“SEBI”) to act as
a Trustee of the various scheme(s) of the Axis Mutual Fund.

5. Axis Asset Management
Company Limited (“Axis AMC”), incorporated under the provisions of the
Companies Act, 1956, was approved by SEBI to act as the Asset Management
Company for the scheme(s) of the Axis Mutual Fund.

6. By the Deed of Trust dated 27^th
June, 2009, the settlor, inter-alia, declared and agreed that the Trustee
Company shall manage the mutual fund in accordance with the applicable regulations. Further, as per para
6.1.1 of the Deed of Trust dated 27^th June, 2009, the Trustee
Company is allowed to float one or more schemes for the issue of units to be
subscribed by the public.

7. The responsibility for the daily operations
of the scheme(s) of Axis Mutual Fund has been delegated to the Axis AMC through
an investment Management Agreement dated 27^th June, 2009 executed
between the Trustee Company and Axis AMC. As enumerated in Clause 3 of this
Agreement dated 27^th June, 2009, the delegated responsibilities,
inter alia, include the maintenance of accounts and records, evaluation of investment
operations, carrying out credit assessments in relation to proposes
investments.

8. It is the contention of the Petitioner that
by the Deed of Trust dated 27^thJune, 2009, multiple trust(s), i.e. scheme(s), were created as and when floated. The various clauses of the
Deed of Trust indicating independent existence of each scheme is provided in
the table below:-

Para

Text

4.3.1

Entrustment
of property

The
liabilities of a particular Scheme shall be met out of assets of the same
scheme and shall in no way attach to or become a liability of any other
scheme.

4.3.2

Entrustment
of property

The
Trustee Company shall ensure that proper and separate accounting records are
maintained for each scheme.

6.1.14

Functions
of Trustee Company

Distribute
dividend and income of the relevant Scheme, as and when the same may become
due and payable.”

The contention of the
dealer was that though there is one trust deed, there are actually multiple trusts
as per the schemes. It was submission that a trust is an obligation annexed to
the ownership of property. It was also submitted that as clearly evident from
Deed of Trust, such obligations are towards the beneficiaries of each scheme
and not towards the beneficiaries of all the schemes put together. Accordingly,
it was argued that the receipts of each scheme to be seen separately. If it so
seen then for Axis Gold ETF Scheme, the condition of 50% of sale of the gross
receipts gets fulfilled and Rule 53(6)(b) will not apply. The reliance was
placed on the judgment of the Hon. Supreme Court in case of Commissioner
of Income Tax, Andhra Pradesh and Anr. vs. Trustees of H. E. H. the Nizam’s
Family Trust (1986) 4 SCC 352.

On behalf of revenue the
above submission was opposed on the ground that trust is registered as dealer
and hence it is one dealer and the rejection of set off applying Rule 53(6)(b)
is correct.

The Hon. High Court
discussed various aspects including the judgment cited in case of Nizam’s
Family Trust. However, under the scheme of the Rule 53(6)(b), the Hon. High
Court upheld the action of the revenue.

The observations of the
Hon. High Court are as under;

“46. Such is not the case
before us. There is a single Deed of Trust. There may be separate schemes, but
there was never any intent as is now sought to be culled out and to create
separate Trust. This is not a case where separate Trusts were created and
hence, the principle relied upon by Mr. Sridharan from several works on Law of
Trust and to the effect that receipts from Axis Mutual Fund ETF alone have to
be considered for there is formation of more than one trust by the Deed of
Trust and that is permissible, has no application. This has no application here
because the earlier principle and based on the case of Commissioner of Income
Tax, Bombay City 1, Bombay vs. Manilal Dhanji, Bombay 3 is inapplicable. This
is not a case where the settlor has created more trusts under a single Trust
Deed. This is a clear case where the Deed of Trust permits floating one or more
schemes. That is not equivalent to creation of separate Trusts. It is in these
circumstances that the assessing officer, the first appellate authority and the
Tribunal all rightly concluded that the set-off available under Rule 53 has to
be reduced. It shall be accordingly in part or full in the event of any of the
contingencies specified and to the extent specified in sub-rule (6) of Rule 53.
Pertinently, the set-off has not been disallowed in full. It is hold that in
the case clearly specified of gross receipts of a dealer in any year and if
from that, receipts on account of sale are less than 50% of the total receipts,
then, insofar as the dealer, who is not a hotel or restaurant, the set-off is
permissible only on those purchases effected in that year where the
corresponding goods are sold or resold within six months from the date of
purchase. There is no creation of separate Trusts, but separate schemes under a
single Trust Deed are floated.”

Thus, the application of
Rule 53(6)(b) was justified.

Conclusion

The above judgment will be
guiding judgment to interpret the scope of Rule 53(6)(b). However, leaving
aside the legality, the effect is that there will be double taxation in as much
as the set off is denied though on the sale of same goods, tax is collected. It
is for the policy makers to reconsider the issue and to give necessary relief
considering the scheme and object of the VAT system.

shailesh.kwebmaker

PENALTY- CONCEALMENT-INTERPRETATION

Introduction

Under any fiscal law, there are
provisions for levy of penalty. Penalties are normally related to tax quantum
found payable at the end of the proceeding. Normally, these provisions are made
to tackle deliberate attempts of the assessee to avoid tax payment. One of the
events to attract penalty is concealment by the concerned assessee. However,
such penalty is not expected to be levied when the dues arise under bona
fide belief and action. For example, there may be case where assessee shows
the transactions in his accounts and returns but claims the same as exempt on
its bona fide interpretation of provisions of law. Subsequently, such
interpretation may not be acceptable to the revenue department and dues may
arise. In such cases, levy of penalty cannot be justified. However, the issue
remains that, how to decide about bona fide mistake on part of the
assessee. There may be cases where the department will impose penalty inspite
of plea of bona fide mistake on part of assessee.

Recent
judgment

Recently, Hon’ble Rajasthan High
Court had an occasion to deal with such a situation in case of Commercial
Taxes Officer, Anti Evasion, Rajasthan, Circle-III, Jaipur. vs. I.C.I.C.I Bank
Ltd. (2018) 54 GSTR 389 (Raj).

The facts, as
narrated by Hon’ble High court, are as under:-

“The brief facts noticed are that
the claim of the assessee is that the assessee is engaged in providing finance
to the prospective buyers of vehicle and if buyers after certain time fail to
pay the regular installment (EMI) as per agreement arrived at by and between
the assesse and the buyer (assessee) gets the right to repossess the vehicle
and get it transferred in its own name and thereafter either directly or
through agent, can dispose/auction the vehicle whether such transaction is
eligible to tax under Rajasthan Value Added Tax Act (RVAT) or not. It is
undisputed fact that all the three authorities, namely assessing officer,
Deputy Commissioner (A) as well as the Tax Board have upheld that the
transaction is eligible to tax under the RVAT Act, following the judgment of
the apex court in the case of Federal Bank Ltd vs. State of Kerala(2007) 6
VST 736 (SC). However, in so far as penalty u/s. 61 of the Act is concerned,
while the assessing officer imposed penalty which was upheld by the Deputy
Commissioner (A) but the Tax Board in the impugned order has held that there is
no case of imposition of penalty u/s. 61 of the Act and accordingly, deleted
the penalty in all the assessment years.”

The argument of the revenue
department was that when the law was already laid by Supreme Court in case of Federal
Bank Ltd vs. State of Kerala(2007) 6 VST 736 (SC), there is no
justification for non-levy of penalty. In other words it was submitted that
after above judgment there is no debatable position and what was done by the
assessee bank is deliberate and therefore, the penalty required to be restored.

Hon’ble Rajasthan High Court
observed that the Tax Board has come to correct finding. Since all the
transactions were duly disclosed and it is the matter of interpretation,
whether VAT is leviable or not, the issue cannot be covered under penalty
clause. In this respect, Hon’ble High Court has relied upon the Supreme Court
judgment in case of Sree Krishna Electricals vs. State of Tamil Nadu
(2009) 23 VST 249 (SC).

In above judgment regarding similar
clause of penalty under Tamil Nadu Sales Tax law, Hon’ble Supreme Court has
observed as under:

“So far as the question of penalty
is concerned the items which were not included in the turnover were found
incorporated in the appellant’s accounts books. Where certain items which are
not included in the turnover are disclosed in the dealer’s own account books
and the assessing authorities includes these items in the dealers’ turnover,
disallowing the exemption. penalty cannot be imposed. The penalty levied stands
set aside.”

Accordingly, following above ratio
of Supreme Court judgment, Hon’ble Rajasthan High court has justified removal
of penalty by Tax Board.

In relation to penalty matters, the
basic principle laid down by Hon’ble Supreme Court in the land mark judgment in
case of Hindustan Steel Limited, (25 STC 211), is also required
to be kept in mind. The relevant observations are as under:

“Under the Act penalty may be
imposed for failure to register as a dealer: section 9(1) r/w section 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.”

Conclusion

The
penalty is discretionary and can be justified only where there is deliberate
and conscious disregard of the law. When the disregard is due to technical
reasons, no penalty can be justified. From the Hon’ble Rajasthan High Court’s
judgment, as above, it is also clear that in spite of judgment of courts on the
issue covered, the assessee can still take different view and litigate the
matter. If the transactions are otherwise recorded in the books levy of penalty
cannot be justified. It is expected that the above principles will be followed
by the revenue department in true spirit.

shailesh.kwebmaker

Goods Vis-À-Vis Intellectual Service

Introduction

Under
Sales Tax Laws tax could be levied on sale/purchase of goods. The term ‘goods’
is defined in the Constitution and it is also normally defined in the State
Sales Tax Laws. For example, the definition of ‘goods’ under MVAT Act is as
under in section 2(12):

“(12)
“goods” means every kind of movable property not being newspapers, actionable
claims, money, stocks, shares, securities or lottery tickets and includes live
stocks, growing crop, grass and trees and plants including the produce thereof
including property in such goods attached to or forming part of the land which
are agreed to be severed before sale or under the contract of sale;”

This
term is also discussed and interpreted in various judgements. The landmark
judgement is in case of Tata Consultancy Service (137 STC 620)(SC).
Regarding ‘goods’, Hon. Supreme Court has observed as under:

“17.
Thus this Court has held that the term ‘goods’, for the purposes of sales tax,
cannot be given a narrow meaning. It has been held that properties which are
capable of being abstracted, consumed and used and/ or transmitted,
transferred, delivered, stored or possessed etc. are ‘goods’ for the purposes
of sale tax. The submission of Mr. Sorabjee that this authority is not of any
assistance as a software is different from electricity and that software is
intellectual incorporeal property whereas electricity is not, cannot be
accepted. In India the test, to determine whether a property is ‘goods’, for
purposes of sales tax, is not whether the property is tangible or intangible or
incorporeal. The test is whether the concerned, item is capable of abstraction,
consumption and use and whether it can be transmitted, transferred, delivered,
stored, possessed etc. Admittedly in the case of software, both canned
and un-canned, all of these are possible.”

Inspite
of Supreme Court’s interpretation of the term ‘goods’ still the controversies
keep up coming from time to time.

Judgement of Tribunal in case of Sungrace Engineering Projects Pvt. Ltd.
(Second Appeal No.198 of 2015 dt.2.9.2016).

Hon.
Maharashtra Sales Tax Tribunal had an occasion to deal with similar issue in
above judgment.

Facts

The
facts are narrated by Tribunal as under:

“Appellant
is a Private Limited Company carrying on the business of sale of software,
conducting surveys, preparing reports and consultancy in various fields.
Appellant is duly registered under B.S.T. Act. Company is assessed under
Section 33 for the period 01/04/1999 to 31/03/2000 on 07/08/2002. Assessment
had resulted in Nil tax demand. Later on, the Deputy Commissioner of Sales Tax
(Adm.) M-61, Pune Division, Pune (in brief, “The Revision Authority”) took
this case for revision u/s. 57 of BST Act after noticing that, professional
receipts shown in the balance-sheet worth Rs.1,13,23,186/- are received on
account of sale of technical know-how i.e. preparing lay outs, surveys and
submitting report to the customers, Government which according to Revisional Authority
is one of the types of transfer of knowledge or transfer of technology; that
falls within the purview of Schedule entry C-I-26 (7) of the B.S.T. Act.
Technical know-how is taxable @ 4%. Assessing Authority failed to levy tax on
Rs.1,13,23,186/-.”

In
course of argument, appellant further elaborated the facts as under:

“4. On
merits of the case, Mr. Gandhi, Ld. Chartered Accountant further, explained
that appellant has collected amount of Rs.1,13,23,186/- stated above from
different Government Authorities and Private Agencies. The nature of services
rendered is mainly preparation of designs, drawings of all components of dam
under Maharashtra Krishna Valley Development Corporation in brief, ”MKVDC “) of
irrigation projects, consultancy services for survey of pipe lines alignments,
soil investigation, consultancy services for survey preparing financial
estimates, preparing reports including detail designs and drawings as mutually
agreed between the parties. Major work is done as a contractor client to the
Executive Engineer, Irrigation Department of Government of Maharashtra, and
there are some sub-contracts regarding government works but done on behalf of
other private parties. He further, explained that by no stretch of imagination,
the nature of work conducted by the appellant can be termed “sale of technical
know-how,” as prescribed in entry C-I-26(7) of the B.S.T. Act. He further,
explained that running bills clearly explains what was the nature of work done.
According to him, the Revision Authority and the First Appellate Authority have
wrongly held that the transactions were in the nature of sale of technical
know-how by applying one or two criteria without confirming that the
transactions confirm all necessary ingredients is illegal or cannot be sustained.
The said condition is as below:-

“All
the studies layouts, drawings, design notes which have been submitted to the
Maharashtra Krishna Valley Development Corporation shall become the absolute
property of MKVDC under the Copyright Act and the consultant shall not use the
same in whole or part thereof elsewhere for any purpose without explicit
written permission from MKVDC.”

The
department reiterated the contentions as per revision order and further relied
upon the judgement of Tribunal in case of I. W. Technologies Pvt. Ltd.
vs. The State of Maharashtra (SA No.429 of 2004, decided on 22/10/2008).

Hon.
Tribunal considered the arguments of both the sides and also referred to entry
C-I-26 of the BST Act and held
as under:

“9. Heading of the said entry itself clearly
states that the goods are incorporeal or intangible characters are covered
under this entry, then question before us is whether the services rendered by
appellant are goods of intangible nature. We have to see the authorities referred
from both sides. M/s I.W. Technologies Pvt. Ltd. (cited supra).
The dealer was carrying on the business of selling water purification systems
and components and parts thereof. It used to undertake engineering and
consultancy services. It undertook work from M/s. Sudarshan Chemical Industries
Ltd. for upgrading their Effluent Water Treatment Plant at Roha. M/s. Sudarshan
Chemical Industries Ltd. carried out the work with their contractor as per
models, designs, drawings, specifications of civil works, electrical works
under the guidance and technical knowledge of M/s I.W. Technologies Ltd.
Therefore, it was held that there was sale of technical know-how. But in the
present case, surveys and reports, designs, drawings of the dam and the
irrigation projects are prepared as per specifications provided by the
employer. Appellant prepared reports, drawings, designs, etc., with the
help of their technical expertise in the field.

10. The tender condition mentioned above, and
relying on the same departmental authorities levied tax as property is covered
under Copyright Act, there is sale of “Copy right .”

11. Provision under Copyright Act, in section
17(d) it is prescribed that-

Section
17. “Subject to provisions of this Act the author of work shall be the first
owner of the Copyright therein provided that

(a) to
(c) not relevant

(d) in
the case of Government work, Government shall in the absence of contract to the
contrary be the first owner of the Copyright therein.”

In
view of this provision it is clear that whatever work, done by the appellant,
was owned by the Government and therefore there was no question of sale of
technical know-how.

Observing
as above Hon. Tribunal held that the levy of tax is not sustainable as it is
not sale of goods but rendering of services. Tribunal set aside the revision
order.

Conclusion

The
judgement throws light on the nature of “goods”. Normally, the goods are first
produced and then delivered. However, when the transaction is for intellectual
service which is also not transferable to other parties, it will amount to
service and not goods. The judgement will be useful for making distinction
between goods and intellectual service.

shailesh.kwebmaker

ENTRY TAX ON GOODS IMPORTED FROM OUT OF INDIA

Introduction

A burning issue prevailed
about levy of Entry tax on goods imported from out of India.

The State tax on Entry of
Goods into Local Areas is levied by State Governments by enacting respective
State Acts. The Act is enabled by Entry 52 of List II of Schedule VII of
Constitution of India.

Different State Governments
have enacted such Acts including Maharashtra. The Act generally provides for
levy of entry tax on goods, which entered into the State from outside the State
for consumption, use or sale therein. The question for consideration herein is
what is the meaning of words ‘from outside the State’?

Controversy

There were contradictory
judgments about scope of ‘outside the State’.

In case of Fr.
William Fernandez vs. State of Kerala (115 STC 591) (Ker), the Hon.
Kerala High Court held that the scope of entry of goods from outside the State
will be restricted to goods brought from outside State but from place within
India. In other words, when the goods are imported from out of India there is
no intention to levy Entry Tax by State Act. The judgment was based on overall
scheme of Constitution that imported goods are immune from levy of State tax
and that the State Governments are intending to tax goods coming from other
States and not from out of India.

There are contrary
judgments from other High Courts also like in Reliance Industries Ltd.
vs. State of Orissa (16 VST 85) (Ori), the Orissa High Court justified
levy of Entry Tax even on goods imported from out of India.

The above controversy
ultimately came before the Hon. Supreme Court.

The
Supreme Court has given its judgment in case of State of Kerala vs. Fr.
William Fernandez (54 GSTR 21)(SC).

The main issues raised for
non-levy of goods imported from outside India are rejected by the Hon. Supreme
Court. The main principles observed by the Hon. Supreme Court can be noted as
under: –

(i) The law provides for
entry into local area from “any place” outside State “Any Place” has wide
extent and need not be restricted to place within India.

(ii) Entry 52 permits tax
on entry of goods into local area for consumption, use or sale and has nothing
to do with origin of goods.

(iii)
When the charging section is clear, provisions cannot be read narrowly to mean
that the imported goods coming from outside country are excluded from charge of
entry tax.

(iv) Even in some State
Entry Tax Acts, specific words are used to include goods imported from outside
the country, and that is by abandon caution thus cannot affect scope in other
State Acts.

(v) The entries in Schedule
VII are regarding field of legislation and not only power of legislation.

(vi) There is no over
powering between State and Union in respect of entries in the field of
Legislation.

(vii) There cannot be said
any intrude of State power into Union power, by levying entry tax on goods
imported from outside India.

(viii) Restriction by
Article 286 on levy of tax on sale/purchase covered by section 5 of CST Act as
sale in course of import/export cannot be brought in, while interpreting Entry
52 in List II.

(ix) The custom duty provisions
also do not hit levy of entry tax as entry tax is levied after import is over.
Import continues till goods are cleared for home consumption. Once so cleared,
they are part of common mass and hence eligible to tax by States.

(x) Though in the concept of
valuation, custom duty is not included in State Entry Tax Act, it is
inconsequential for deciding validity of law.

(xi) Even if, name suggests
levy by local authorities, State is empowered to levy such tax.

(xii) Other grounds about validity like user of tax
collection etc., were rejected, as they have nothing to do with validity of
levy.

Thus, holding as above the
Hon. Supreme Court upheld entry tax on goods imported from outside India.

Some relevant observations
of the Hon. Supreme Court are as under:

“58. The plain and literal construction when
put to section 3 read with section 2(d) clearly means that goods entering into
local area from any place outside the State are to be charged with entry tax.
Foreign territory would be a place which is not only outside the local area but
also outside the State. The writ petitions are trying to introduce words of
limitation in the definition clause. The interpretation which is sought to be
put up is that both the phrases be read as:

(1) “from any place outside that local area but
within that State”;

(2) any place outside the State but within
India.

59. It is well known rule of statutory
interpretation that be process of interpretation the provision cannot be
rewritten nor any word can be introduced. The expression ‘any place’ the words
‘outside the State’ is also indicative of wide extent. The words ‘any place’
cannot be limited to a place within the territory of India when no such
indication is discernible from the provisions of the Act.

60. The entry tax legislations are referable to
entry 52 of List II of the Seventh Schedule to the Constitution. Entry 52 also
provided a legislative field, namely, ‘taxes on the entries of goods into a
local area for consumption, use or sale therein’. Legislation is thus concerned
only with entry of goods into a local area for consumption, use or sale. The
origin of goods has no relevance with regard to chargeability of entry tax…”

Further:

“75. The distribution of power between Union and
States is done in a mutually exclusive manner as is reflected by precise and
clear field of legislation as allocated under different list under the Seventh
Schedule. No assumption of any overlapping between a subject allocated to Union
and State arises. When the field of legislation falls in one or other in Union
or State Lists, the legislation falling under the State entry has always been
upheld.”

The Hon.
Supreme Court also observed as under: –

“83. As
noted above, although, Nine Judges Constitution Bench had left the question
open of validity of entry tax on goods imported from countries outside the
territories of India, the two Hon’ble Judges, i.e. Justice R. Banumathi and
Justice Dr. D.Y. Chandrachud while delivering separate judgment have considered
the leviability of entry tax on imported goods in detail. Both Hon’ble Judges
have held that there is no clash/overlap between entry levied by the State
under Entry 52 of List II and the custom duty levied by the Union under Entry
83 List I. We have also arrived at the same conclusion in view of the foregoing
discussions. We thus hold that entry tax legislations do not intrude in the
legislative field reserved for Parliament under Entry 41 and under Entry 83 of
List I.

The State Legislature is fully competent to impose tax on the entry of
goods into a local area for consumption, sale and use. We thus repel the
submission of petitioner that entry tax legislation of the State encroaches in
the Parliament’s field.”

Conclusion

The law
about levy of Entry tax has now become clear. The interpretation on many
Legislative aspects by
the Hon. Supreme Court will be useful for guidance in future.

shailesh.kwebmaker

PACKAGE SCHEME OF INCENTIVES – PROPORTIONATE INCENTIVES VIS-À-VIS RETROSPECTIVE EFFECT TO SECTION 93 OF THE MVAT ACT

This feature started as Sales Tax corner
in 1995-96. The first contributors to write it were Govind G Goyal and C B
Thakar. The feature was started with the intention to spread awareness about
Indirect Taxes, and more particularly sales tax as excise duty was covered by
another column titled Excise Duty Spectrum. Sales tax was replaced by VAT in
2005 and so the feature explained the new law initially. Later it was renamed
as VAT.

The
feature covers contemporary issues under VAT. It is an analytical feature where
a topic or an issue under it is selected and discussed in light of available
decisions from the highest court to the tribunals. Authors give a conclusion at
the end and offer their views. When we asked them what keeps them going they
said: “As we travel for speaking engagements across the country, we receive
positive feedback and that has been the major source of motivation for us”.
Talking about BCAJ@50, Govind Goyal said, “Its journey must continue with same
zeal, with same enthusiasm in pursuit of such a noble cause of sharing &
spreading knowledge.”

Package Scheme of Incentives –
Proportionate Incentives vis-à-vis retrospective effect to section 93 of the MVAT Act

Introduction

Under MVAT era there were
incentive schemes, for backward area units,
announced by the State Government from time to time, which were also
known as Package Scheme of Incentives (PSI). The incentives used to be given to
new units as well as for the expansion of the existing unit. The unit enjoying
original benefits under the PSI may have carried out expansion and therefore
may also become eligible for further PSI benefits by separate certificate for
expansion.

Under the 1993 PSI, the
units, who got the Entitlement Certificate for expansion, took benefit on the
whole production of the unit. While the Government was contemplating only
proportionate exemption i.e. in the ratio of production from exempted unit as
compared to total production.

However, the Hon. Bombay
High Court in case of Pee Vee Textile Ltd. (26 VST 281)(Bom)
ruled that once the unit holds Entitlement certificate even only for Expansion,
till the unit is entitled to take the benefit for total production and no pro
rata working is applicable.

Amendment in MVAT Act

Having above back ground,
Government of Maharashtra amended the MVAT Act, 2002 and inserted section 93
and 93A in the MVAT Act in 2009 with retrospective effect from 1^st
April 2005.

By the
above amendment, the Government prescribed the Scheme for pro rata
benefit in relation to Expansion. This amendment was retrospective and hence it
was challenged before the Bombay High Court. The Hon. Bombay High Court
delivered judgment in case of Jindal Poly Films Ltd. (63 VST 67)(Bom)
in which it was held that legislature has power to amend the position
retrospectively and hence the retrospective amendment was upheld. In view of
above it was general feeling that there are no chances to avoid pro rata
working of benefits from 1.4.2005.

However, recently there is
a judgment from the Hon. Bombay High Court in relation to above issue wherein
in spite of above position laid down earlier Hon. High Court has given
favorable judgment. The reference is to the judgment in case of Finolex
Industries Ltd. (MVAT A.No.61 of 2017 dt.29.10.2018).

Facts in above case

The facts, narrated by the
Hon. High Court in the judgment, may we read as follows:-

“3. The Appellant Company,
in the year 1994, has made a fixed capital investment of Rs.329.5 crore,
thereby creating a new manufacturing factory in Ratnagiri (hereinafter referred
to as “Ratnagiri Factory”) for manufacturing of PVC Resins and also PVC Pipes.
The said factory claimed the benefits of the Package Scheme of Incentives which
was prevailing at the relevant time, known as PSI 1988 and an eligibility
certificate under Part I of the 1988 Scheme was granted to the appellant by
SICOM qua its Ratnagiri unit. By virtue of the said eligibility
certificate, the appellant was held eligible for maximum entitlement of sales
tax incentives of Rs. 313,03,07,000/- by way of exemption. The said eligibility
certificate was valid for a period of 10 years from 4^th April 1994
to 30^th April 2004. On the basis of the said eligibility
certificate, the Sales Tax Department also issued an entitlement certificate on
25^th April 1994 to the appellant and both the certificates mentioned
the production capacity as 1,30,000 metric tonnes. The said eligibility
certificate expressly described the unit of the appellant as “Pioneer Unit”. In
the year 1993, a new Package Scheme of Incentives substituted the existing
Package Scheme of Incentives. The appellant made a further investment in its
Ratnagiri unit to the tune of Rs.208.89 crore in August 2002 and accordingly,
the existing capacity of PVC Resins and extruded products like pipes, flared up
from 1,30,000 metric tonnes to 2 lakh metric tonnes per annum. The appellant,
accordingly, made an application for availment of necessary incentives in terms
of 1993 Package Scheme of Incentives vide application dated 8^th
October 2002. Accordingly, on 10^th February 2003, a fresh
eligibility certificate was issued to the appellant in the capacity as Pioneer
Unit by SICOM. The said certificate issued on 11^th February 2003 was
valid for 106 months i.e. from 1^st August 2002 to 31^st
May 2011 and the eligibility certificate issued in favour of the appellant for
additional fixed capital investment of Rs. 20889.76 lakhs for village Ranpar,
District Ratnagiri was made subject to review/ monitoring every year. Certain
conditions were stipulated in the said eligibility certificate which included
the condition of automatic curtailment of the eligibility certificate from the point
of time when the total sales tax incentives admissible under the Scheme are
availed of, or exceed the limits as specific in the 1993 Package Scheme of
Incentives i.e. on attaining 69.93% of the gross value of Fixed Capital
Investment actually made subject to a ceiling of Rs. 20889.70 lakh i.e.
Rs.14,608.17 lakh or from the date from which the certificate of entitlement is
either cancelled or revoked, whichever event occurred earlier.

4. The certificate of
Entitlement issued in favour of the appellant on 21^st October 2002
by SICOM did not incorporate any condition whatsoever that availment of
incentives should be on proportionate basis of increase in production capacity
to the additional investment. The consequential certificate of entitlement
dated 10^th February 2003 issued by the Sales Tax Department,
according to the appellant, also does not in any condition stipulating that the
appellant should avail the incentives on a proportionate basis of increase in
production capacity of additional investment. It is the specific case of the
appellant that for the Financial Years 2005-06, 2006-07, 2007-08 and 2008-09
and in particular, for the Financial Year 2005-06 in respect of which the
present Appeal is filed, the appellant relied upon the eligibility certificate
and the Entitlement certificate issued in its favour and claimed complete
exemption from taxes for the entire turnover of sales made by it from Ratnagiri
unit. It is the case of the appellant that it fully satisfied all the
conditions of exemption imposed under the notification dated 1^st
April 2005 issued under the MVAT Act 2002 and necessary declarations were also
duly made on the invoice as required in the notification. As such, the
appellant exhausted the eligible quantum of benefit under the entitlement
certificate in the month of March 2009 itself. The appellant also claimed a
refund of tax paid on purchases in terms of Rule 78 of the MVAT Rules 2005 for
the period from 4^th February 2006 to 1^stMarch 2006 and
accordingly, the respondent granted provisional refund to the appellant
amounting to Rs. 5,65,39,588/.

Perusal of the chronology
of events would further reveal that on 22^nd February 2013, an
assessment order was passed by the Assessing Authority for the disputed period
2005-06.

In the assessment order,
the Assessing Authority applied the provisions of section 93 of the MVAT 2002
as retrospectively substituted by Maharashtra Act No.XXII of 2009 and only
allowed the exemption to the extent of prorate turnover of 35%. The assessing
authority rejected the claim of 100% exemption without applying prorate factor
on the ground that the dealer has not produced any books of accounts and has
not identified the goods manufactured by old and new units and there was no
identification of goods. Resultantly, the appellant was assessed to VAT Tax at
Rs. 6,07,82,694/- and the claim was verified and finally allowed at
Rs.10,30,85,904/and it was held that the assessment had resulted in excess
amount which was refunded to the dealer. For the remaining amount, a demand
notice was served on
the appellant.”

The
argument of the appellant was that since the benefits are already exhausted and
it has started paying tax subsequent to exhaustion and that there is no
periodicity available for taking benefit of modified working, the retrospective
amendment should not be made applicable to it.

On the part of Government
the argument was that the law should be applied as already upheld by the Hon.
Bombay High Court and only pro rata benefit should be granted,
irrespective of the consequences.

The Hon. Bombay High Court
has held that in the above specific circumstances the position should not be
disturbed. Hon. High Court concluded the position in following words.

“26. The findings recorded by the First
Appellate Authority as well as the Tribunal is amiss the legal position laid
down by the Hon’ble High Court in ACC Ltd Vs. State of Maharashtra (supra),
wherein it was categorically held that the expansion made by the existing
pioneer unit which specified conditions under para 3.12(b) will not be hit by
expansion under para 8.1(i)(c). The amendments made by Maharashtra Act No. XXII
of 2009 will not apply to units whose Cumulative Quantum of Benefits have been
fully utilized before expiry of the eligibility period even if the incentive is
computed in terms of amended Section 93 of the MVAT Act, 2002.

The amendment inserted by
Act No. XXII of 2009 would only govern those units where the Cumulative Quantum
of Benefits has not yet lapsed without full utilization and is in the process
of being availed. The eligibility availed under Section 93(1) is computed for a
particular year and if there is excess availment, then, the benefits can be
withdrawn. The challenge to the constitutional validity of Act No. XXII of 2009
was rejected by a Division Bench of this court in case of Jindal Poly Films
(supra) which is upheld by the Hon’ble Apex Court and thus, upholding the
retrospectively of the said amending enactment. The amendment of Section 93(1)
being retrospective in the sense would make the provision applicable to the
unit set up before the date of the said amendment, but in respect of sales
which are made by such unit on or after 27^th August 2009. Since the
appellant has already exhausted the benefits of exemption before 27^th
August 2009, the appellant cannot be deprived of the said benefits in light of
Section 93A which was inserted with effect from 27^th April 2009. The
amendment, thus would not apply to the sales already made between 1^st
April 2005 and 28^th August 2009. A retrospectively of a statute has
to be tested in the backdrop of its nature. A statute is not said to be
retrospective in operation merely because a part of the requisite for its
operation is drawn from a time antecedent to its passing. A situation which
takes away or impairs any vested right acquired under the existing law or which
creates a new obligation or imposes a new liability will be treated as
retrospective. If the amendment which is made on 27^thAugust 2009
applied to a unit to deprive it of all the exemptions of sale after 27^thAugust
2009, then, the amendment would affect such vested right and not merely a
future or contingent right and it would be retrospective in operation. The
industrial unit like the appellant which has been set up before 27^th
August 2009 and fulfilled all the requirements of the scheme, which was
prevailing, relating to enjoyment of certain sales tax benefits and if it had
fulfilled all the requirements of the scheme, then, a vested right is created
in favour of the unit to avail the exemption for a specified period and if on
the basis of an amendment which deprives the unit of all such benefits, it
would be retrospective in operation and would be against the spirit of a taxing
statute.”

Thus, favorable position is
available inspite of retrospective amendment.

Conclusion

The judgment gives much
required relief to the backward area units. In fact many units have suffered
financially due to retrospective amendment. This judgment will save many of
such units and they will not be affected by the retrospective amendment. This is
good judgment considering the basic intention of the Scheme. This judgment will
also be guiding judgment in relation to retrospective amendments, where
applicable and where not applicable.

shailesh.kwebmaker

‘Sale’ vis-à-vis exchange/barter

Introduction
Under Sales Tax Laws, the transactions of ‘sale’ are liable to tax. The transaction of ‘sale’ is to be understood as per Sale of Goods Act, as held by Hon’ble Supreme Court in case of Gannon Dunkerly & Co. (9 STC 353)(SC). In this case, Hon’ble Supreme Court has interpreted the term ‘sale’ and has held that the transaction to be a sale, it should fulfill the minimum criteria as laid down in Sale of Goods Act. In fact, Hon’ble Supreme Court has observed as under in relation to transaction of sale:-

“Thus, according to the law both of England and of India, in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which of course presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods ……”

From above passage it is clear that to be a ‘sale’ following criteria should be fulfilled.

(i) There should be two parties to contract i.e. seller/ purchaser,
(ii) The subject matter of sale is moveable goods,
(iii) There must be money consideration and
(iv) Transfer of property i.e. transfer of ownership from seller to purchaser.

Deemed sale by way of works contract

By 46th Amendment to the constitution, the concept of deemed sales was introduced which can be taxed under sales tax laws. One of the deemed sales is ‘works contract’ which has been introduced by Article 366 (29A)(b) in the Constitution of India.

A question arose as to whether the whole works contract price is liable to tax or only value relating to the goods. While analyzing the taxability of above deemed sale category of works contract, Hon’ble Supreme Court in case of Builders Association of India (73 STC 370)(SC) stated as under:

“Hence, a transfer of property in goods under sub-clause (b) of clause (29-A) is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and a purchase of those goods by the person to whom such transfer is made. The object of the new definition introduced in clause (29-A) of article 366 of the Constitution is, therefore, to enlarge the scope of “tax on the sale or purchase of goods” wherever it occurs in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub-clauses (a) to (f) thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. So construed the expression “tax on the sale or purchase of goods” in entry 54 of the State List, therefore, includes a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract also. The tax leviable by virtue of sub-clause (b) of clause (29-A) of article 366 of the Constitution thus becomes subject to the same discipline to which any levy under entry 54 of the State List is made subject to under the Constitution..”

It can be seen that works contract is nothing but composite transaction for supply of goods and for supply of services. By the constitution amendment the composite transaction is notionally divided between goods and services.

It is also clear that to the extent of supply of goods the nature and character of supply is at par with normal sale of goods. In other words, all the criteria as applicable to normal sale i.e. as discussed above in Gannon Dunkerly & Co. (73 STC 370)(SC) are equally applicable to this deemed sale under works contract.

Therefore, even under works contract, the transaction should be against money consideration and if it is against any other consideration in form of goods or property etc., it cannot be a taxable transaction under sales tax laws, as it will not fall in the category of ‘sale’ but in the category of ‘barter’ or ‘exchange’.

Definition of ‘sale’ under MVAT Act, 2002
The definition of ‘sale’ in section 2(24) of MVAT Act, 2002 is 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….”
(emphasis supplied)

It can be seen that even under MVAT Act, 2002, the works contract transaction should be against cash/deferred payment or other valuable consideration.

‘Other valuable consideration’
The term ‘other valuable consideration’, in relation to sales tax laws, is also well understood by judicial pronouncements. Reference can be made to the judgment of Kerala High Court in case of M. Jaihind vs. State of Kerala (111 STC 374)(Ker).

“The essence of a sale lies in the transfer of property “for cash or for deferred payment or for other valuable consideration”. The definition of “sale” contained in the Kerala General Sales Tax Act, 1963 cannot be construed to include within its ambit those transactions which do not fall within the definition of “sale” as contained in the Sale of Goods Act, 1930 and the definition in the Kerala General Sales Tax Act, must therefore be construed accordingly. Section 4 of the Sale of Goods Act defines “sale” as a transaction whereby there is transfer of property in goods to the buyer for a price. Section 2(10) of the Sale of Goods Act defines “price as money consideration for ‘sale of goods’”. Thus, in order that a transaction may amount to a sale in accordance with the Sale of Goods Act, the consideration has to be money. The expression “cash or deferred payment or other valuable consideration” used in the definition of “sale” in section 2(xxi) of the Kerala General Sales Tax Act has to be construed to mean cash or some other monetary payment. The words “other valuable consideration”, which occur in section 2(xxi) of the Act can be interpreted by rules of ejusdem generis, as the payment by cheque, bills of exchange or other negotiable instruments. The words “deferred payment or other valuable consideration” used in section 2(xxi) of the Kerala General Sales Tax Act merely enlarge the ambit of the consideration beyond cash, but do not carry it outside the scope of the term “money”. If, the consideration is not money, but for other valuable consideration, it cannot then be a sale.”

Thus, the ‘other valuable consideration’ should also be in money terms like Bill of Exchange or Cheque etc..

Recent judgment of MST Tribunal in relation to SRA Project Hon’ble MST Tribunal had an occasion to decide one of the important issues in relation to alleged works contract transaction. The judgment is in the case of M/s Sumer Corporation (VAT SA No. 335 of 2015 dtd 3.5.2016).

In this case, the facts noted by the Tribunal are as under; “2. Appellant contends that he is engaged in the business of construction of buildings and tenements for Slum Rehabilitation Authority (SRA). He was assessed by the Assistant Commissioner of Sales Tax, (INV- 7), Investigation-A, Mumbai for the period 2006-07 under MVAT Act vide order dated 12/05/2014. It is alleged that in the said assessment, assessing authority levied tax on a transaction which is not a sale within the meaning of MVAT Act.

Appellant states that he has constructed buildings for SRA for which he did not receive any money consideration. No contract value in terms of money was fixed. According to him, as per agreement, he has received TDR (Transferable Development Rights), which he has sold and realised money out of that. He claims that the transaction was barter and cannot be taxed under MVAT Act.

He states that assessing authority assessed him as unregistered dealer (URD). He contends that the assessing authority has committed illegality by holding the sale value of TDR and proposed value of TDR as turnover and tax is calculated on the same. He states that TDR itself is not taxable under the MVAT Act. Hence, he contended that appeal be allowed.”

Appellant had submitted that the transfer of property in the given transaction was against allotment of TDR which itself was immovable property or goods but not money consideration. Therefore, it is barter or exchange and not a sale by works contract. The department had considered the money received by sale of TDR as receipt from SRA and levied tax on the same. This was objected to on the ground that sale of TDR is separate transaction and cannot be directly linked as money consideration from SRA.

It was also submitted that if at all the TDR is to be considered as consideration, there was no mechanism given in the law to convert the same in money consideration on which tax could be levied. Relevant judgments were cited.

Hon’ble Tribunal came to the conclusion as under:
“19. Taking into consideration the definition of sale under the MVAT Act as defined in section 2(24) the word ‘other valuable consideration’ would include anything that would directly or indirectly fetch some element of money or any other consideration. In the present case, TDR which is mentioned as Transfer Development Rights can be converted into money and in the present case already appellant has en-cashed some TDR and obtained considerable amount therein and, therefore, TDR would be a valuable consideration. Under these circumstances, the contention of the appellant that the transaction is barter or free of cost or without consideration cannot be accepted.”

Thus Tribunal has departed from settled position that there should be consideration in money terms from the buyer itself. Hon. Tribunal has expanded the meaning of ‘other valuable consideration’ in relation to contracts observing that the earlier judgments are now not relevant after 46th Amendment.

Hon’ble Tribunal has also not appreciated that there is no procedure laid down for conversion of TDR in to money term to compute tax. Hon’ble Tribunal has applied its own theory and held that the monetary value can be ascertained as market value by reference to ready reckoner for stamp duty at the relevant time of agreement. Thus the Tribunal held that transaction is taxable but changed the mode of computation. Lower authorities have levied tax on amount received against sale of TDR, whereas Tribunal has shifted it to market value on the date of agreement. The tax computation is left to the lower authorities.

Conclusion
Though works contract transactions are made taxable, it is equally important that all the criteria, as required to make a transaction a sale transaction, are also applicable to works contract. Further, assuming that consideration in form of other property is also valid than there should be a procedure, prescribed by law, to convert the value of such consideration in money terms. Like, under Service Tax, there are provisions to arrive at monetary value for levy of service tax when the consideration is other than money. Unless such provisions are available under MVAT Act itself, no tax can be attracted on barter transactions. Therefore, the judgment of Hon. Tribunal cannot be said to be final. A decision by higher judicial forums will lay down the correct position.

shailesh.kwebmaker

“Transfer of right to use” vis-à-vis “Permissible Use”

Introduction
The controversy about nature of a transaction as to whether it is ‘transfer of right to use’ or nothas been debated for long.. Intermittently there are judgments from different forums giving different views and at times conflicting views. Asituation has also arisen that both VAT and Service Tax are being levied on same amount. It was long felt that the issue, whether service tax is attracted or VAT is attracted, should be decided by the Hon. High Court by making both authorities VAT and Service tax authorities parties to the dispute. Mahayco Monsanto Biotech (India) Pvt. Ltd. (W.P. No.9175 of 2015) & Subway Systems India Pvt. Ltd. (W.P.No.497 of 2015) dated 11.8.2016.

Recently Hon. Bombay High Court had an occasion to deal with the above delicate issue once more in above matters. The important aspect of the Writ Petitions is that along with VAT department of State Government, Service Tax Department of Central Government was also made party to the Writ Petition. Both writ petitions are decided by common judgment. However, facts in both cases are different.

It will be useful to refer to judgment in each case separately.

Mahayco Monsanto Biotech (India) Pvt. Ltd. (W.P. No.9175 of 2015 dated 11.8.2016).

The facts as noted by Hon. High Court in above case are as under:

“11. The Petitioner in Writ Petition No. 9175 of 2015, Monsanto India, is a joint venture company of Monsanto Investment India Private Limited (“MIIPL”) and the Maharashtra Hybrid Seeds Co. Monsanto India develops and commercializes insect-resistant hybrid cottonseeds using a proprietary “Bollgard technology”, one that is licensed to Monsanto India by Monsanto USA through its wholly-owned subsidiary, Monsanto Holdings Private Limited (“MHPL”). This technology is further sublicensed by Monsanto India to various seed companies on a non-exclusive and nontransferable basis to use, test, produce and sell genetically modified hybrid cotton planting seeds. In return for this technology, Monsanto India receives trait fees based on the number of packets of seeds sold by the sub-licensees. These sub-licensing agreements, with almost 40 seed companies, are the transactions in question. Respondent Nos.1 and 2 in the Monsanto Writ Petition are the Union of India and the State of Maharashtra respectively. Respondent No.3 is the Principal Commissioner of Service Tax. Respondent No. 4 is the Commissioner of Sales Tax.”

The arguments were from various angles including the argument that the allowance touse is non exclusive and not covered by ‘transfer of right to use’ category in view of judgment in case of Bharat Sanchar Nigam Ltd.(145 STC 91)(SC). Payment of service tax on same amount was also pointed out in the arguments made. Judgment in case of Tata Sons Ltd. vs. State of Maharashtra (80 VST 173)(Bom) of Hon. Bombay High Court was argued to be distinguishable as well as otherwise argued to be per incurium. It was urged that no distinction can be made between tangible and intangible goods and therefore, the law laid down in BSNL equally applies to intangible goods also.

However, Hon. High Court did not concur with above submission and justified levy of VAT . Hon. High Court concluded as under:

“37. We have considered most carefully this submission. It is indeed sophisticated in its construction, and, at first blush, appears most appealing. On reflection and a closer examination, we find ourselves unable to subscribe to the interpretation Mr. Venkatraman so eloquently commends, viz., that his transaction is one of a merely permissive use. We find this interpretation not to be supported by law, and we have the most serious reservations about the universal applicability of his propositions, which seem to us to be overbroad and to cast the net too widely. The first question is whether there is a ‘transfer’ within the meaning of Article 366(29A)(d). We believe there is. It is true that the essence of a ‘transfer’ is the divesting of a right or goods from transferor and the investing of the same in the transferee, and this is what Salmond on Jurisprudence and Corpus Juris Secundum both say. In our opinion, the seeds embedded with the technology are, in fact, transferred. Monsanto India is divested of that portion of the technology embedded in these fifty seeds and these are fully vested in the sub-licensee. Mr. Venkatraman is not correct when he says that the effective control of the ‘goods’ is with Monsanto India. In RINL, the Supreme Court concluded that the contractor (transferee) did not have effective control over the machinery, despite the fact that he was using it, since he could not make such use of it as he liked. He could not use the machinery for any project other than that of the transferor’s, nor could he move it out during the period of the project. We do not see how we can draw a parallel from that case to the one at hand. The effective control over the seeds, and, therefore that portion of the technology that is embedded in the seeds, is entirely with the sub-licensee. That sub licensee is not bound to use the seeds (and the embedded technology) in accordance with Monsanto India’s wishes. Monsanto India cannot further dictate to the sub-licensee what he or it may do with these technology-infused seeds. The sub-licensee can do as it wishes with them. It may not use them at all. It may even destroy the seeds. Once the transaction is complete, i.e., once possession of the technology-imbued seeds is effected, and those seeds are delivered, Monsanto India has nothing at all to do with the technology embedded in those fifty seeds given to the sub-licensee.

At no point does Monsanto India have access to this portion of the technology. In other words, the transfer is to the exclusion of Monsanto India. This clearly satisfies the so-called BSNL “twin test” that Mr. Venkatraman is at pains to propound. Mr. Venkatraman’s argument that the seeds are “merely the media” and therefore irrelevant is, in our opinion, erroneous. They are relevant for the simple reason that the technology could not have been given to the sub-licensee without them; and there is no other method demonstrated anywhere of effecting any such transfer.”

Thus, Hon. High Court rejected all arguments about transfer of technology within scope of permissible use but held it as complete transfer of right, to constitute deemed sale liable under VAT . Hon. High Court has also cited various examples about what constitutes goods in relation to intangible goods.

The alternative argument that it is sale of seeds, hence exempt under Schedule Entry A-41 of MVAT Act was also rejected.

The other main argument about non attraction of VAT as Service Tax is paid did not impress the court. The further plea to direct transfer of service tax paid to VAT department was also not considered by Hon. Court by observing as under:

“53. Mr. Venkatraman makes one more, without prejudice argument, in case neither of his previous arguments succeeds. He submits that even if the agreement in question is held to be a transfer of the right to use (deemed sale) and that it does not fall under the exemption for seeds in the MVAT Act, then the levy and collection of Service Tax by the Union of India would be without the authority of law since VAT can only be levied and collected by the States. As argued earlier, the same transaction cannot be taxed as both a sale and a service. Monsanto India has already paid service tax for the entire period at a rate significantly higher than what is provided under the MVAT Act and therefore he says that it is not liable to pay further tax. For the period between May 2007 and February 2009, it has paid service tax at a rate of 12.36%, for March 2009 to March 2012 at a rate of 10.3%, for April 2012 to May 2015 at 12.36%, and for the period beginning June 2015 at a rate of 14%.

Under Entry 39 of Schedule C of the MVAT Act, the applicable rate of sales tax is only 5% since April 2010, prior to which it was 4%. He therefore seeks a Writ of Mandamus directing Union of India to transfer the amount paid as service tax from the Consolidated Fund of India to the Consolidated Fund of State of Maharashtra. He argues that such a transfer would not amount to unjust enrichment. We decline to enter into this debate. We leave it to Monsanto India to adopt suitable proceedings in this behalf, and leave their contentions open to the necessary extent.”

There will thus be a looming question of double tax payment.

Subway Systems India Pvt. Ltd. (W.P.No.497 of 2015 dated 11.8.2016)

The facts in this case are noted by High Court as under:

“55. A brief description of Subway’s business is this. Subway was granted a non-exclusive sub-license by Subway International B.V. (“SIBV”), a Dutch limited liability corporation to establish, operate and franchise others to operate SUBWAY -branded restaurants in India. This non-exclusive license was granted to SIBV itself by Subway Systems International Ansalt, which in turn was granted such a license by Doctor’s Associates Inc., an entity that owns the proprietary system for setting up and operating these restaurants.

These restaurants serve sandwiches and salads under the service mark SUBWAY. The agreement includes not only the trade mark SUBWAY , but also associated confidential information and goodwill, such as policies, forms, recipes, trade secrets and the like.

Typically, Subway enters into franchise agreements with third parties, under which it provides specified services to the franchisee. In return, the franchisee undertakes to carry on the business of operating sandwich shops in Subway’s name. The agreement only provides for a very limited representational or display right, and the franchisee cannot transfer or assign these exclusive rights to any third person. Subway also reserves the right to compete with these franchisees in the agreement. Under this agreement, Subway receives two kinds of consideration, one being a one-time franchisee fee which is paid when the agreement is signed; and the second is a royalty fee paid weekly by the franchisee on the basis of its weekly turnover. A sample franchise agreement is annexed. Under these agreements, the franchisees have no more than a right to display Subway’s intellectual property in the form of marks and logos, and a mere right to use such confidential information as Subway discloses and as prescribed by the franchise agreement.”

Based on above facts, the issue was examined by the Court. In this case also the ratio of BSNL relied upon. Hon. High Court ultimately held as under:

“69. We believe that Mr. Shroff is correct when he says that the agreement between Subway and its franchisees is not a sale, but is in fact a bare permission to use. It is, therefore, subject only to service tax. In our opinion, the fact that the agreement between Subway and its franchisee is limited to the precise period of time stipulated in the agreement is vital to Subway’s case. At the end of the period of the agreement, or before in case there was any breach of its terms, the right of the franchisee to display the mark ‘Subway’ and its trade dress, and all other permissions would also end. This is what sets this agreement apart from the case of Monsanto and its sublicensee. There, the seed companies could do as they pleased with the seeds; they could alienate or even destroy them. In Subway’s case, there are set terms provided by the agreement which have to be followed. A breach of these would result in termination of the agreement.

We believe that there is no passage of any kind of control or exclusivity to the franchisees. In fact, this agreement is a classic example of permissive use. It can be nothing else. For all the reasons in law and fact that the sub-licensing of technology in Monsanto is held to be a transfer of right to use, this franchising agreement must be held to be permissive use.”

Thus on ground that the agreement is for permissible use, it is held that it is not a sale by transfer of right to use but a ‘service agreement’.

One more issue dealt with by Hon. High Court is that for situs of sale by transfer of right to use, the place of agreement, as decided by Supreme Court in case of 20th Century Finance Corp. Ltd. ( 119 STC 182)(SC), is relevant.

In this case, the agreement was signed in Delhi and hence High Court held that otherwise also the transaction cannot be taxed in Maharashtra, inspite that the users are in Maharashtra.

Conclusion
The issue about sale by transfer of right to use or service transaction has become vexed and requires decision on facts of each case. Even in above judgment, Hon High Court has observed that each agreement, whether titled as franchise or something else, will be required to be decided on the basis of actual terms and scope of agreement. The dealers will thus be under threat of uncertainity taxation and most probably by both departments, till the issue gets resolved at a higher forum. Some undisputable criteria for deciding nature of transaction is required to be specified to avoid such uncertain situation.

shailesh.kwebmaker

Retrospective cancellation of R.C. of the buyer vis-à-vis validity of C form

Introduction
When the sales are in the course of inter-state trade, one of the facilities available is applicability of lower rate of tax, if the sales are effected to a registered dealer under the CST Act. However, such lower rate is available to the transaction, if the said sale is supported by C form as obtained by the seller from the buyer. One of the conditions of C form is that the buyer, issuing C form, should be registered dealer under the CST Act at the time of purchase.

There are instances where the registration of the buying dealer is cancelled with retrospective effect. Under such circumstances, there is also cancellation of C form which is issued earlier. The effect is that the selling dealer may get affected because of such cancellation. Its sale will be considered as without valid C form, which will invite higher rate of tax.

Recent judgment
Hon. Delhi High Court had an occasion to deal with such situation in case of Jain Manufacturing (India) Pvt. Ltd. vs The Commissioner Value Added Tax & Anr (W.P.(C)1358 of 2016 dt.1.6.2016. The facts, as narrated in the judgment, are as under:

“3. The Petitioner made an inter-state sale of goods to Respondent No.2 (Purchasing Dealer) by way of two invoices both dated 10th March, 2015. The first invoice was for a sum of Rs.7,53,373/- and the second for a sum of Rs.2,49,715/-. In terms of Section 8(1) (b) of the CST Act with Respondent No. 2 being a dealer registered under the CST Act in New Delhi [apart from being registered under the Delhi Value Added Tax Act, 2004 (DVAT Act)] as of that date, and having purchased the goods from the Petitioner by way of inter-state sale, tax at the concessional rate of 2% was chargeable in the invoices and was accordingly included in the invoices raised by the Petitioner. The said two invoices accordingly mentioned the CST amounts as 15,067 and 4,994 respectively. The total sums of the 2 invoices were Rs.7,68,441/- and Rs. 2,54,709/- respectively. The payments for these invoices were made by RTGS into the Petitioner’s bank account.

4. On 13th April 2015, Respondent No. 2 obtained C-Form from the DT&T in respect of the aforementioned two invoices. A copy of the said C-Form is enclosed with the petition as Annexure P-4. It shows that it was a system generated C-Form containing details of the purchasing dealer i.e. Respondent No.2 with its Registration Certificate Number and the amount up to which such registration is valid. The name and address of the purchasing dealer i.e. Respondent No. 2 has also been indicated. It also bears the TIN and name of the selling dealer i.e. the Petitioner. It contains the details of the two invoices dated 10th March, 2015 with the respective amounts.

5. The Petitioner later learnt that the above C-Form had been cancelled by the DT&T. In order to verify this, the Petitioner checked the website of the DT&T. The status of the C-Form issued to the Petitioner was shown as cancelled on 27th November, 2015. The Petitioner also obtained a copy of an order passed by the Assistant Value Added Tax Officer (AVATO) in Form DVAT-11 on 4th August, 2015 cancelling the registration of Respondent No.2. A copy of the said cancellation order has been enclosed as Annexure P-6 to the petition. It was noticed that the cancellation was made retrospective from 26th February, 2014.

6. It is in these circumstances, the present petition has been filed contending that there was no power under the CST Act or in the Rules there under, viz., the Central Sales Tax Act (Registration & Turnover) Rules, 1957 or the Central Sales Tax (Delhi) Rules to cancel a C-Form issued by the DT&T.”

In the writ petition the petitioner made a submission that the C form had been cancelled because the registration of the buying dealer was cancelled retrospectively. It was argued that there is no power for retrospective cancellation of the Registration. It was further argued that as a selling dealer it is only required to ensure that on date of sale the buying dealer is holding valid registration certificate (RC) under CST Act. The retrospective cancellation cannot affect the selling dealer. The judgments in case of Suresh Trading Company (109 STC 439)(SC) and in case of Santosh kumar and Company (54 STC 322)(Ors) were cited.

On behalf of State, it was argued that the selling dealer was indulging in proxy litigation as the buying dealer, in whose case RC is cancelled, has not come forward. It was argued that the selling dealer, who is from Kanpur has no locus to contest the matter. It was also submitted that the transaction of sale was under cloud and it was suspected of being effected with collusion. It was further argued that there is no vested right in the purchasing dealer to insist issuance of C form in its favour. However, the State could not point out any provision under CST Act by which RC can be cancelled retrospectively.

After hearing both the sides Hon. High Court observed as under:

“16. The central issue in the present case is whether there exists a power in the Commissioner VAT, Delhi under the CST Act and the Rules there under to cancel a C-Form and further if such power exists then whether in the facts and circumstances of the present case such power was rightly exercised.

17. No provision in the CST Act has been brought to the notice of the Court which enables an authority issuing a C-Form to cancel the C-Form. Rule 5(4) of the Central Sales Tax (Delhi) Rules, 2005 enables the authority which has to issue a C-Form to “withhold” the C-Form. The contingencies under which a C Form may be withheld are set out in Rule 5(4). For instance, Rule 5 (4) (v) envisages that some adverse material has been found by the Commissioner “suggesting any concealment of sale or purchase or furnishing inaccurate particulars in the returns.” The Commissioner could, in terms of the proviso to Rule 5(4), instead of withholding the C-Form, issue to the applicant such forms in such numbers and subject to such conditions and restrictions, as he may consider necessary. However, there is no specific provision even under the aforementioned Rules which enables the Commissioner to cancel the C-Form that has already been issued.

18. There is merit in the contention that one of the primary requirements for issuance of a C-Form is that the dealer to whom the C-Form is issued has to have a valid CST registration on the date that the C Form is issued. If the purchasing dealer does not possess a valid CST registration on the date of the transaction of sale, then the selling dealer cannot insist on being issued a C-Form. In the present case, on the date of the transaction i.e. 10th March, 2015 the purchasing dealer viz., Respondent No. 2 did posses a valid CST registration. The name of the purchasing dealer as shown in the invoices, and the name and address of the registered purchasing dealer as reflected in the C-Forms issued by the DT&T matched. The cancellation of the CST registration of Respondent No. 2 took place subsequently on 4th August 2015. Therefore, there was no means for the Petitioner as the selling dealer to suspect as of the date of sale or soon thereafter that the payments made to it RTGS was not by Respondent No.2 but by some other entity with the same name. It is not possible, therefore, to straightaway infer any collusion between the Petitioner and Respondent No. 2 or for that matter the other entity of the same name spoken of by the DT&T.

19. In any event, from the point of view of the Petitioner, the requirement of section 8(1) of the CST stood fully satisfied. The purchasing dealer had a valid CST registration on the date of purchase of goods by the Respondent No. 2 from the Petitioner. The C-Form issued by the DT&T confirmed the registration of Respondent No.2 under the CST Act.”

The Hon. High Court has referred to various judgments in support of above holding. After above discussion Hon. High Court also discussed about the practical effect of the cancellation of C forms in following words:-

“26. It was submitted by Mr Narayan that there would be a practical difficulty in the DT&T seeking to inform every selling dealer in the country of the cancellation of registration of a purchasing dealer registered under the CST Act in Delhi and that the remedy of the selling dealers in such instance would be to proceed against the purchasing dealers. In the considered view of the Court, if the selling dealer has after making a diligent enquiry confirmed that on the date of the sale the purchasing dealer held a valid CST registration, and is also issued a valid C Form then such selling dealer cannot later be told that the C Form is invalid since the CST registration of the purchasing dealer has been retrospectively cancelled. Where, a selling dealer fails to make diligent enquiries and proceeds to sell goods to a purchasing dealer who does not, on the date of such sale, hold a valid CST registration then such selling dealer cannot later be seen to protest against the cancellation of the C-Form. As observed by the Supreme Court in Commissioner of Sales Tax, Delhi v. Shri Krishna Engg. (supra) the selling dealer in such instance will have to pay for his “recklessness”.

27.To answer the problem highlighted by Mr Narayan, the best course of action would be for an authority to cancel the CST registration prospectively and immediately place that information on its website. In such event, there would be no difficulty in the selling dealer being able to verify the validity of the CST registration of the purchasing dealer. However, where the cancellation of the registration and, consequently of the C-Form is sought to be done retrospectively, it would adversely affect the rights of bonafide sellers in other states who proceeded on the basis of the existence of valid CST registration of the purchasing dealer on the date of the inter-state sale. That outcome is not contemplated by the CST Act and the Rules there under.”

Conclusion
It is one of the much awaited judgments to protect the interest of genuine dealers. Now-a-days, under fiscal laws, there is a tendency to put more and more burden on the dealers and the authorities only exercise power of recoveries and that too from dealers who are otherwise regular and available. No attempt is made to nab the defaulters and fraudsters. Under such circumstances, the above judgment is path breaking. It is the department who should keep watch on defaulters and take necessary action against them for recovery and should not put burden on the genuine dealers.

shailesh.kwebmaker

Guthka, Whether Tobacco?

Introduction

Under
Sales Tax Laws, the rate of tax depends upon classification
of the given product under a particular entry. There are certain entries which
are with reference to classification under Central Excise Tariff act etc. in
other words, the entry may provide that if the item is covered by a particular Excise
Tariff, then the said item may be liable at nil rate or concessional rate.

under the
MVAT Act, there
are several such
items which are classified in different entries with reference to
classification under Central Excise Tariff.

Recent controversy about classification of Guthka:

After
coming into effect of the Maharashtra Value Added Tax Act, 2002, new
classification came into effect. Amongst others, exempted goods are covered by
entries in Schedule A and other taxable items are classified under Schedule B,
C, D and E. there is also an entry for tobacco (modified from time to time).
The controversy about classification of ‘guthka’ prevailed for initial two
years i.e. 2005-06 & 2006-07.

The
Hon. Bombay High Court had an occasion to decide such dispute in case of Ghodawat Energy Pvt. Ltd. Writ Petition No.
8572 of 2015 dt. 4.10.2016.

In
the above case, the dealer, m/s. Ghodawat energy india Pvt. ltd. Was classifying its item ‘guthka’ under above
entry as tobacco. However, the department, based on explanation, held the item
as not covered by Schedule A and therefore levied tax under residuary entry E-1
at 12.5%.

To
challenge the Constitutional validity of levy of tax as well as to contend that
explanation is not retrospective and can apply only from 1.2.2006, the above
Writ Petition was filed before the Hon. Bombay High Court.

The
facts noted by the Hon. High Court in the judgment are as under:

“3.
The writ petition is filed by contending that the petitioner in this writ
petition is a private limited company, incorporated and registered under the indian
Companies act, 1956, having its registered office at the address mentioned
herein above.

4.
Respondents nos.1 to 4 are the authorities exercising powers together with the
State itself under the Maharashtra Value Added
Tax Act, 2002 (for short “MVAT”).

5.
The petitioner, inter-alia, engages itself in the business of manufacturing pan
masala. During the period under dispute, namely, financial year 2005-2006, the petitioner has
manufactured and sold pan masala with or without tobacco. The petitioner claims
that it has discharged its vat liability under the MVAT act. The petitioner
manufactures pan masala not containing tobacco under the brand name “Star Pan
masala” classifiable under tariff heading 21069020 of the Central Excise Tariff
act, 1985. The petitioner claims that it has discharged its vat liability of
12.5% on the sale of such pan masala not containing tobacco. At annexure-a
collectively are copies of invoices for sale of such pan masala.

6.
The petitioner also manufactured and sold pan masala containing tobacco,
commonly known as “Guthka” / “mawa” under various brand names. That is
classifiable under tariff heading 24939990 of the Central Excise Tariff act,
1985 during the relevant period. The petitioner has claimed exemption on
payment of vat on sale of such pan masala containing tobacco under Schedule
entry A-45 of the MVAT act, 2002. The relevant period is 1st April, 2005 to
31st march, 2007.

7.
The said pan masala containing tobacco
is described in column (2) of the first
Schedule to the additional duties of excise (Goods of Special
importance) act,1957 (for short “ADE act, 1957”). during the period 1st April,
2005 to 28th February, 2006, the petitioners have discharged ade at
18% on the sale of such pan masala containing tobacco.

8.For
the period 1st April, 2005 to 28th
February, 2006, therefore, the petitioners have claimed exemption from
payment of vat on sale of such pan masala containing tobacco under Schedule
entry A-45 of the MVAT act, 2002.

9.
Entry 45 of the Schedule a to the MVAT
Act, 2002, as introduced, reads as under:

Sr. no.

name of the

Commodity

Conditions
and ex- ceptions

Rate of tax (%)

date
of
effect

Sugar, fabrics

Nil %

1-4-2005

and tobacco as

to 31-1-

described from

time to time in column 3 of the First schedule

to the additional duties of excise
[Goods of Spe- cial Importance) act, 1957.

2006

10.
However, in exercise of the powers
conferred u/s. 9(1) of the MVAT act, 2002, the State Government of Maharashtra,
vide notification no. VAT/1505/Cr-382/

Taxation-1 dated
21st January, 2006,
amended the Schedule a and
Schedule C with effect from 1st February, 2006, by inserting explanation to
Schedule entry A-45 as under :

“Explanation-
for removal of doubts, it is hereby declared that tobacco shall not include Pan
masala, that is to say, any preparation containing betel nuts and tobacco and
any one or more of the following ingredients, namely :

(i) Lime,
and

(ii) Kattha (Catechu)

Whether
or not containing any other ingredient such as cardamom, copra and menthol.”

11. With effect from 1st march, 2006, pan
masala containing tobacco falling under 24039990 of the first Schedule to ade
act, 1957, was liable to additional duty of excise @ 18% under the said
Schedule. However, the said tobacco product was exempt from payment of
additional duty of excise in view of exemption notification no.11/2006-C.E. dated
1st March, 2006.

12.
Simultaneously, the rate
of basic excise
duty leviable on such tobacco products under Chapter 24 of the Central Excise
Tariff act, 1985, was suitably increased with no change in total excise duty.
In other words, practically there was no exemption from ADE Act, 1957.

13. Consequently, with effect from 1st march,
2006, on sale of pan masala containing tobacco, petitioners paid increased
amount of central excise duty. It continued to avail exemption from payment of
vat vide entry A-45 of the MVAT for the period from 1st March, 2006 till 31st
march, 2007.

14.
Since the said pan masala containing tobacco is
described in column
(3) of the
first Schedule to the additional duties of excise (Goods of
Special importance) act, 1957, during the relevant period of time, the
petitioners have discharged ade at 18% on the sale of such pan masala
containing tobacco. Illustrative copies of the invoices for sale of such pan
masala containing tobacco are annexed collectively as annexure-B of the paper
book.”

In
the judgment, arguments
of both the
sides have been elaborately
noted. on behalf of the petitioner, the
argument was that
since additional duties
of excise are applicable, no tax
can be levied as per entry a-45. It was also argued that since State Government
shares additional duties of excise, there is a Constitutional bar on levy of
sales tax. Judgment of hon. Supreme Court in case of Godfrey Phillips (India)
Limited & Anr. vs. State of Uttar Pradesh & Ors. (2005) 2 SCC 515 was
relied upon.

In
respect of retrospective effect of explanation, it was submitted that it is issued
under a delegated power and under such circumstances, there cannot be power to
issue notification with retrospective effect.

On
behalf of department, it was submitted
that sharing of additional duties is a matter between State and Centre and it
cannot affect the Constitutional right of a State to levy tax.

The
explanation was only for clarification of doubt and hence it was submitted that
it had retrospective effect.

The
Hon. High Court observed as under:

“63. The
constitutional provisions,so far referred to, our mind do not indicate
that the State is denuded, much less divested of its power to levy and impose a
tax on sale or purchase of goods. Therefore,
Schedule VII list II entry 54 authorises the State legislature to impose taxes on sale or purchase of goods
other than newspapers, subject to the provisions of entry 92A of list I.

64.
We have
no hesitation in
agreeing with Mrs. Jeejeebhoy when she submits that these
constitutional provisions create no
embargo on the
State’s power to impose tax on
the sale or purchase of pan masala containing tobacco.

68.
A bare perusal of this would indicate that the doubts were sought to be
removed. The doubts whether tobacco would include pan masala. That has been
clarified by declaring that tobacco shall not include pan masala i.e. to say
any preparation containing betel-nuts and tobacco and any one or more of the
ingredients in sub- clause (1) to clause (10). to be precise, the Government of
Maharashtra amended by the notification with effect from 1st February,
2006, Schedules a and C appended to the Maharashtra value added tax act
in terms of the powers conferred by section 9(1) of the MVAT act. That power is
of adding or modifying or deleting any entry in the schedule. The power is of amendment
of the Schedule as above and equally to reduce or enhance the rates of tax or
for specifying the rates of tax or for specifying the rates of tax, where nil
rates are specified.”

Conclusion

Thus,
the Hon’ble High Court rejected both the grounds and upheld levy from
retrospective effect. The classification of product under fiscal entries is a
complicated process. It appears that in respect of additional duties, the law
is still not settled and a clarification on such issues at the beginning of
classification will be more appreciated.

shailesh.kwebmaker

Fate of ‘Hoarding’, hanging !

Introduction
The issue about levy of VAT on transactions of ‘transfer of right to use goods’ (lease transaction), has become highly debatable. On one hand dealers are paying service tax, whereas the sales tax departments are levying VAT considering the same as transactions of ‘lease’, therefore, ‘deemed sale of goods’.

Particularly, the controversy relating to levy of tax on charges for advertisement hoardings, has become more complex due to conflicting judgments of various.

Hoarding – the concept
The hoardings are normally put up on strategic locations like on the roads, buildings, flyovers etc. Normally these properties belong to government authorities or may belong to private parties. Such authorities or parties, as the case may be, grant licenses for putting up hoardings by accepting proposals through tender etc. On getting such permission, the advertising agencies create necessary infrastructure on the given premises. Normally, hoardings are fixed on a metal frame, which are again fixed into the walls/land etc., and sometimes may require civil work also. The actual customer, desiring to put advertisement, will stick their printed material on paper/flex or other such material on such hoarding. The period of display is normally pre-agreed. Against such advertisements the advertising agency gets charges. Considering such activity as of rendering services either advertisement services or leasing of immovable property etc., service tax is paid.

Whether hoarding charges liable under VAT?
There are different judgments on the above issue.

Selvel Advertising Private Ltd. vs. Commercial Tax Officer (89 STC 1) (WBTT)
In this judgment, the West Bengal Taxation Tribunal, by majority, held that the receipts towards hoardings are liable to Sales Tax as lease sales. The structure/hoarding was held as movable property.

The State of Tamil Nadu vs. Tvl. Jayalakshmi Enterprises 2011-12 (17) TNCT-J P. 92.(Mad)

Held, structure is immovable property and hoardings are not liable to VAT /Sales Tax.

M/s.TIM Delhi Airport Advertising Pvt. Ltd. vs. Special Comm.-II, Dept. of Trade and Taxes (W.P.(C)1625/2014 & CM 3374/2014 dt.2.5.2016) (Delhi)

The hoardings were situated in Airports, a restricted area. High Court held that, there is no possibility of advertiser giving control of hoarding and hence not liable to VAT .

Recent Judgment
Recently Hon. Kerala High Court had an occasion to deal with above issue in case of Delta Communications vs. The State of Kerala (90 VST 438)(Ker). The facts, as noted by Hon. High Court, are as under:

“2. Brief facts relevant for the disposal of the revision are stated hereunder:

The revision petitioner is a partnership firm engaged in the business of outdoor marketing media at Kottayam. The advertisements are displayed in hoardings for the above purpose. The appellant acquires land on lease in various places in the State of Kerala, and structures are erected on the property taken on lease. Thereafter, hoardings are fixed on this structure and it is let out to various companies for advertising their products. The revision petitioner receives rental charges for letting out the hoardings. During the year 2007-2008, the revision petitioner received rental charges amounting to Rs.36,70,983/-. “

The prime argument of dealer was that it is immovable property, hence, cannot liable to VAT . There was also argument based on ground that there is no passing of effective control, to consider the transaction as lease transaction.

Hon. Kerala High Court referred to various judgments cited on both sides about meaning of nature of immovable property. Hon. High Court rejected the contention of dealer about immovable nature of hoarding in following words;

“14. It is clear that so far as the structures involved in this case are concerned, same are constructed using tempered steel/thick steel poles by attaching the same to a concrete structure embedded on earth and erected using nuts and bolts. The Assessing Authority had evaluated the factual circumstances and came to the finding that the structure erected is ‘goods’ as defined under the Act and therefore is exigible to tax. This finding was confirmed by the First Appellate Authority as well as the Tribunal after taking into account the principles laid down in various judgments of the Apex Court and other Courts and Tribunals. According to us, so far as the structure involved in this case is concerned, taking into account of the explanations of the learned counsel for the petitioner, it is fastened to earth and is detachable easily and therefore, is not an immovable property. Further the structure so erected is never a complicated installation unlike a heavy machinery fitted in a factory premises by assembling various components and then attached to earth, which becomes a complicated procedure, whereas a hoarding is fastened to a concrete structure on earth using nuts and bolts, the removal of which is a simple procedure which makes it a movable article under the Act. In this connection counsel for the petitioner has brought to our attention the judgment in ‘State of Tamilnadu vs. TVL Jayalakshmi Enterprises’ [T.C. (Review) No.430/2006 dated 7.7.2011] and contended that in the said case also the issue related to the leasing out of hoardings for the purpose of advertisement and that the Madras High Court has held that since the hoardings erected on the concrete foundation, not capable of removal without causing any damage to the structure, is part of the immovable property and ceased to be goods for the purpose of attracting levy of tax u/s. 3A of the Act. But, according to us, the Madras High Court has considered the said case on appreciation of the covenants contained in the agreement between the parties and thereupon found that the entire responsibilities were carried out by the assessee and that therefore there is no transfer of right to use goods.”

Regarding contention of effective control also Hon. High Court held in the negative observing as under:

“17. But, according to us, so far as leasing out of hoardings in this case are concerned, once it is let out by entering into an agreement or work order, the owner of the goods ceases to have any control over the same for the reason that the advertisements are affixed on the hoarding by putting up and displaying necessary materials in accordance with the directions of the lessee and he has the effective control of the hoardings throughout the contract period entered into by him with the revision petitioner. The revision petitioner is unable to interfere with the nature of the advertisement carried out by the lessee in the hoardings since as per Annexure-D work order, it is his absolute right to finalise the nature of advertisement that is put up on the hoardings. Therefore, according to us, the absolute control of the hoardings is transferred to the lessee by virtue of Annexure-D work order. Therefore, we are of the definite opinion that the control of the hoardings once it is passed for erecting advertising materials is left with the lessee absolutely for the period specified and therefore there is transfer of right to use as provided u/s. 6(1)(c) of the Act. Therefore the second question raised by the assessee is also answered in the negative and in favour of the Revenue.”

Ultimate argument of payment of Service Tax
Dealer in this case also tried to argue that it has paid service tax on very same receipts. It was canvassed that service tax and VAT are mutually exclusive and hence when service tax is levied and paid, no VAT should apply. This contention was also rejected by Hon. High Court observing as under:

“20. In the second cited decision also, a Division Bench of this Court was considering the question whether the Parliament is competent to authorise levy of service tax on banking and other financial services including equipments leasing and hire purchase. It was concluded that Article 366 (29A) empowers the authorities to impose levy of tax on deemed sale and purchase of goods and the same is not mutually exclusive with the liability for Service Tax. Therefore, according to us, the above two judgments are an authority for the proposition that the service tax and Value Added Tax are not mutually exclusive and if there is liability, both are to be paid by the concerned assessee. Viewed in that background, the contention raised by the revision petitioner that since it is paying service tax, is not liable to pay Value Added Tax can never be sustained.” Thus rejecting all contentions, Hon. High Court upheld taxation under VAT .

Conclusion
It can be seen that there are conflicting judgments on the given issue. It clearly appears that the matter is not decided by any common principle but based on facts/terms of agreements in each transaction and it’s appreciation by the concerned court. In such a situation Dealers will have hard time to visualise their liability. The tragedy is that such a dealer will be liable to pay both Service Tax and VAT on the same transaction. This will be a hard blow to financial viability of dealer. It is felt that not only fate of taxation of hoarding is hanging but the financial existence of dealer itself will be in jeopardy Let there be clarity by law makers on the issue at the earliest to save the plight of the dealers.

shailesh.kwebmaker

Works Contract – Rate Of Tax Vis-À-Vis Nature Of Goods Transferred

Introduction

Taxation of Works Contract
has always remained a debatable issue even under the VAT era. As per the position
prior to GST, Works contract was separate subject by itself as it was
considered as deemed sale. Article 366 (29A)(b) provided the definition of
‘works contract’ which is as under:

(29A) tax on the sale or
purchase of goods includes:-

(a) …

(b) a tax on the transfer of property in
goods (whether as goods or in some other form) invoked in the execution of a
works contract;

As per the definition,
‘transfer of property in goods’ is considered as deemed sale. The issue arose
whether it is single transaction attracting one rate of tax on the total
contract value or transfer of various goods involved in the same so as to
attract respective rates on the goods so transferred? There are a number of
judgements throwing light on the given disputable issue.

Recent judgement of M.S.T. Tribunal

Recently, similar issue
arose before Hon. M.S.T. Tribunal in case of Sai Construction (S.A.No.375
of 2016 dated 31.8.2017) and the period involved was 2008-2009. The
short facts of the appeal narrated by the Hon. Tribunal can be reproduced as
under:

4. Shri V. P. Patkar,
learned Advocate, has explained the entire case and process of work done by the
appellant. The appellant is engaged in execution of works contract in general
and construction contract in special. During the period under assessment,
appellant has constructed road bridges. Contracts were awarded by Executive
Engineer Public Works Department, Miraj. For the purpose of construction of
said bridge, appellant purchased cement,
and metals. Said material is mixed together which is normally called
mortar and used in the construction of bridge. Appellant is assessed u/s. 23(3)
and taxable sale of goods is calculated according to the provisions u/r. 58.
According to Shri Patkar, lower authorities have erred in levying tax @ 12.5%
on sale of ‘sand’ and ‘khadi’ used in the execution of contract. According to
the appellant, sand and khadi is taxable @ 4%. Hence, it should be taxed
accordingly. Concrete prepared from sand and khadi is not purchased. It is
prepared during the process for use in the construction of bridge. Hence
concrete is not purchased by the dealer and not liable to tax @ 12.5%. Shri
Patkar, learned Advocate relied upon various judgments and authorities. We will
mention and discuss the same as we proceed further.

The arguments of the
department are also narrated by the Tribunal as under:

5. Shri S. S. Pawar,
learned Asst Commissioner of Sales Tax (Legal), appeared on behalf of revenue,
he has vehemently argued the case and also relied on various judgments of
different High Courts and Apex Courts. According to Shri S. S. Pawar, it is
important to ascertain what are the goods actually used in the execution of
said contract. The goods used in the contract are liable to tax u/s. 6 of MVAT
Act. The appellant has purchased sand, khadi, cement and they are mixed in
specified proportion. This mixture is called ‘concrete’ or ‘mortar’. Mortar is
then poured in the designed patterns at site. Then what is used in contract is
important. Shri Pawar further stated that, according to the theory of
accretion, goods accreted at the site are subject matter of tax according to
the deeming provisions as promulgated in sub clause (b) of clause 29A of
Article 366 of the Constitution. Transfer of property in the goods under clause
29A(b) of Article 366 is deemed to be sale of the goods involved in the
execution of works contract by the person making the transfer and the purchases
of those goods by the persons to whom such transfer is made. It is not
necessary to ascertain what dominant intention of the contract is.

Based on above two sets of
arguments, the Tribunal referred to historical background of the works contract
taxation and also analysed various judgements cited before it. After having all
the discussion, the Tribunal observed as under:

10. Considering all judgments
and authorities, we have come to the conclusion that, after 46^th
amendment to the constitution it has become possible for the state to levy
sales tax on the value of goods involved in the works contract in the same way
in which the sales tax was leviable on the price of the goods and material
supplied in a building contract which has been entered into two distinct and
separate parties as goods and services (Builders Association of India,
1989)(SC) provisions in section 2(24)(b)(ii) clearly interpret that, sales
means “transfer of property in goods whether as goods or in some other form
involved in the execution of works contract.” It clearly shows that, goods can
be used as goods in the same form or in some other form, it does not make
difference. It clearly indicates that, the goods which are appropriated to the
contract in which property is transferred are liable to tax in the State. When
the property is transferred to the buyer, it may be in some other form.
According to lower authorities, the theory of accretion is important. In the
present case, movable goods in the form of mortar is accreted as per section 6
of the W.C.T. Act, 1989, but not under the MVAT Act, 2002. We do not agree with
this contention of the revenue. Sand and Khadi purchased and appropriated to
the contract of construction of bridge is important aspect for levy of tax.
When transfer of property in the goods is to be held liable to tax then, goods
appropriated to the contract are important. In the present case, sand and khadi
are appropriated to the contract, in which property is transferred, as these
are the goods involved in the execution of bridge construction contract. In
W.C.T. Act, 1989, levy of tax explained in section 6. In section 6 goods were
liable to tax as per their form. Whether goods are sold in the same form or
otherwise was an important aspect but under the provisions of the MVAT Act and
as held by the Apex Court in Builders Association case (cited supra)
state is entitled to levy tax on the value of goods involved in the execution
of contract in the same way in which sales tax was leviable on the price of
goods and material supplied in building contract.

11. Considering all these
aspects and discussions made above, lower authorities have erred in applying
the rate of tax on the goods involved in the execution of contract. In our
considered opinion, in the present case, sand and khadi involved in the
execution of contract is liable to tax at price as arrived at after deducting
various items as per Rule 58 of MVAT Rules. Sand and khadi is used in the form
of mortar and thereafter the transfer of property takes place in the form of
bridge does not make any difference. Constitution article 366(29A)(b) clearly
says that, it is a deemed sale of goods involved in the execution of contract
whether as goods or in some other form. Hence, the tax levied @ 12.5% on
concrete/mortar is liable to be set aside. It requires fresh calculation at
specified rate of sand and khadi. Hence, the matter is required to be remanded
back to the first appellate authority.

Thus, the Tribunal has
provided useful guidelines about nature of goods transferred in a works
contract. It will be useful for discharging correct tax liability.

Conclusion

Under Works Contract, there
are a number of disputes including whether the transaction is a works contract
or not? Similarly, there are disputes about valuation of goods transferred. As
far as rate of tax is concerned, there are also a number of disputes. However,
by the above judgement, there is a very useful guideline to interpret nature of
goods for the purpose of applying rate of tax. _

shailesh.kwebmaker

Sale In Course Of Import Vis-À-Vis Works Contract

Introduction

Under VAT era, one of the
important Constitutional exemptions was for sale in course of import. A sale
transaction taking place in course of import could not be taxed as per Article
286 of the Constitution of India. The transaction in course of import was
defined in section 5(2) of CST Act, 1956, which reads as under:

““S.5. When is a sale or
purchase of goods said to take place in the course of import or export –

(1) —-

(2) A sale or purchase of
goods shall be deemed to take place in the course of the import of the goods
into the territory of India only if the sale or purchase either occasions such
import or is effected by a transfer of documents of title to the goods before
the goods have crossed the customs frontiers of India……..”

It can be seen that there
are two limbs to the above section. First, sale occasioning import, and second,
sale by transfer of documents of title to goods before goods Crosses Customs
Frontiers of India. Many a time dispute arises about first limb, as to what is
its scope. There are a number of pronouncements. However, the recent one
decided by Hon. M.S.T. Tribunal in case of Larsen and Toubro Ltd. – Scomi
Engineering, BHD (VAT App.No.353 of 2015 dated 30.10.2017) can be analysed
to see the scope of said exemption.

Facts of the case

Hon. Tribunal has noted
facts as under:

“The factual background of
this appeal can be stated as below – Appellant, M/s.Larsen and Toubro Ltd. –
Scomi Engineering, Berhad (“LTSEB” for the sake of brevity), Consortium is a
registered dealer under the Maharashtra Value Added Tax Act, 2002 (“MVAT Act”
for short) and under the Central Sales Tax Act, 1956 (“CST Act” for short)
bearing Registration No.27870728473V and 27870728473C respectively. The Mumbai
Metropolitan Regional Development Authority invited pre-qualification
applications from entities interested for the design, development,
construction, commissioning, operation and maintenance of Monorail System on
turnkey basis in Mumbai Metropolitan Region. Since the project involved civil
work as well as manufacture of goods of rolling stock, designing etc.
and since Larsen and Toubro Ltd. is having expertise in civil work and Scomy
Engineering, Berhad (based in Malaysia) has expertise in manufacture of goods,
designing, installing etc., both of them jointly submitted an
application for qualifying to bid in response to the said request of MMRDA.
Thereafter, MMRDA issued a request for proposal inviting bids for the design,
development, construction and maintenance of Monorail System. Accordingly, the
consortium of Larsen and Toubro Ltd. and SEB submitted its response and
submitted a proposal for manufacture and import amongst others of rolling stock
from Malaysia. The joint bid was accepted by MMRDA by a letter of acceptance
dated 07/11/2008. Accordingly, a contract was executed between MMRDA on one
part and consortium of Larsen and Toubro Ltd. and SEB on the other part on
09/01/2009. By this contract, MMRDA awarded to LTSEB a contract for planning,
designing, development, construction, manufacture, supply of Monorail System
from Sant Gadge Maharaj Chowk to Wadala and from Wadala to Chembur Station.
Larsen and Toubro and SEB thereafter divided their respective scope of work in
accordance with the bid submitted by them and a contract was executed between
two members of the consortium LTSE and SEB on 29/03/2010. In this contract, the
portion of the work related to SEB was recorded for the design and supply of
certain goods i.e. rolling stock, signaling equipment, switch equipment and
deco equipment from outside India. These goods were manufactured by SEB in
Malaysia in terms of the bid submitted by MMRDA. The appellant LTSE – SEB had
filed an application for determination of disputed question to the Commissioner
of Sales Tax. By this application, the following question was referred to the
Commissioner for determination – “Whether the rolling stocks imported pursuant
to the contract with MMRDA and supplied in the course of execution of Monorail
Project constitutes a transaction in the course of import u/s. 5(2) of the CST
Act, 1956 and not liable to tax u/s.8(1) of the MVAT Act, 2002?”

3. After giving elaborate
hearing to both sides, the Commissioner of Sales Tax answered this question in
the negative holding that the import of rolling stocks and supplied to MMRDA in
the course of execution of Monorail Project does not constitute a transaction
in the course of import u/s. 5(2) of the CST Act and it is a local sale liable
to tax under the provisions of the MVAT Act. Being aggrieved by the order of
determination of disputed question, the appellant consortiums have approached
the Tribunal in appeal.”

Submission of appellant

The main submission on
behalf of appellant was that the transaction of import was integrated with
local works contract transaction.

For throwing light on same
various factors of transaction were explained like, specifications for
manufacture, imported goods not useable elsewhere and meant only for given
contract with MMRDA and other clauses in contract about inspection/testing etc.
were pointed out.

Based on above facts it was
submitted that either it is one direct import transaction between appellant and
MMRDA or even if they are considered to be two sales one between Scomy
Engineering, Berhad (based in Malaysia) and Consortium and other between
consortium and MMRDA, still the second transaction is exempt as it is the sale
which has occasioned import and hence exempt. Reliance was place on Hon.
Supreme Court judgment in case of K. G. Khosala (17 STC 473)(SC) and ABB Ltd.
(55 VST 1)(Delhi).

Submission of Department

On behalf of Sales Tax
Department, it was argued that no privity of contract has been made out. There
are two sales and the local sale cannot fall under section 5(2). Reliance was
placed in case of K. Gopinathan Nair and others vs. State of Kerala (97
STC 189)(SC). The manufacturing as per specification was disputed on
ground that only requirements were stated by MMRDA and specification are given
subsequently, which cannot satisfy condition of inextricable link. Judgement in
ABB Ltd. was tried to be distinguished on above facts.

Tribunal’s Observations

The Tribunal thereafter
analysed the agreements. The Tribunal found that the specifications are
mentioned in contract with manufacturing place at Malaysia. About the nature of
consortium existence and inextricable link, the Tribunal observed as under:

“20. The issue as to
whether a nexus appears in the contract between MMRDA and movement of goods
from Scomi Engineering, Malaysia. One has to read the terms of the contract as
a whole. It has been argued before us by the learned Senior Counsel Shri.
Sridharan that the Larsen and Toubro and Scomi Engineering formed a consortium
which is neither partnership firm nor a company and nor an association of
persons. It is an unincorporated consortium. It can be seen that unincorporated
consortium cannot be a legal entity in the eyes of law. Scomi Engineering,
which is one of the members of the consortium is itself a manufacturer and
supplier of rolling stock from Malaysia. This suggests that though consortium
members are executing the contract jointly, they have separate existence. If
the contract is perused, on page 140 of the compilation containing contract
agreement, it is mentioned in para A.1.1 that Larsen and Toubro Ltd. is India’s
largest engineering and construction conglomerate with additional interest in
electrical, electronics, etc. Whereas in the same para, it is also
mentioned that Scomi Engineering, Berhad (SEB) is a public limited company
listed on the Kuala lampur Stock Exchange. His business focus is in the energy
and logistic engineering which comprises OCTG machine shops and transportation engineering
such as monorail, buses and special purpose vehicle. It is further mentioned
that wholly owned subsidiary Scomi Rail, Berhad is renowned for its monorail
system. These recitals in the contract show that Larsen and Toubro and Scomi
though formed a consortium, they were specialised in two separate fields and
each had shared execution of that part of work in which each was specialised.
On page 70 of the contract, work share apportionment between consortium members
is demarcated. It shows that 30% of the project value of rolling stock will be
shared exclusively by Scomi Engineering. Similarly, 8% of the project value of
E & M work will be shared exclusively by Larsen and Toubro. It shows that
rolling stock is the responsibility of SEB whereas automatic fair collection
system is the responsibility of Larsen and Toubro. Thus, the contract shows
that the consortium members will operate in two separate fields, one with
engineering work and the other with manufacturing, designing and maintenance of
rolling stock. In the present case, Scomi Engineering, Berhad, Malaysia which
supplied rolling stocks is one of the members of the consortium and therefore
the question naturally arises as to whether the person can sell goods to
himself. Moreover, the parties are covered by the contract between MMRDA and
consortium and therefore we have to look into the terms and conditions of the
said contract to examine as to whether the movement of goods from Malaysia was
in pursuance of the contract between consortium and MMRDA. The terms clearly
show that the contract was executed by MMRDA with full understanding that Scomi
Engineering, Malaysia is one of the members of the consortium which is expert
and skilled in designing and manufacturing of rolling stock and the rolling stock
will be manufactured in Malaysia and will be supplied to MMRDA. Therefore,
there is merit in the argument of Shri. S. Sridharan that merely because
rolling stocks are first sent to Nhava Sheva port and they are delivered to
consortium and then consortium delivered the same to MMRDA, inextricable link
is not broken down.”

The Tribunal observed about
various judgments cited before it. The Tribunal also referred to various other
documents filed before it. About application of judgment cited by Sales Tax Department,
the Tribunal observed as under:

“38. Since Shri Sonpal has argued that the
principles laid down by the Hon’ble Supreme Court in the case of K. Gopinathan
Nair are not fulfilled in the present case, we have perused the said authority.
The main principles laid down in that case are that a sale or purchase can be
treated to be in the course of import if there is a direct privity of contract
between the Indian importer and the foreign exporter and the intermediary
through which such import is effected merely acts as an agent or a contractor
for and on behalf of the Indian importer. Thus, it is also laid down that there
must be either a single sale which itself causes the import or is in the
progress or process of import or though there may appear to be two sale
transactions they are so integrally interconnected that they almost resemble
one transaction. If these tests are considered and the present contract is
seen, it must be seen from the documents filed by appellant that though there
was no express condition in the covenant that rolling stock should be imported
from Malaysia, such understanding between the parties can be inferred since
Scomi Engineering, BHD is one of the Member of the consortium and in the
document of contract, it is mentioned that Scomi Engineering has all the
manufacturing unit in Malaysia. Section 5(2) of the CST Act requires that
movement of the goods from foreign country should be in pursuance of the
contract. From the terms of the contract, it appears that the intended movement
of goods from Malaysia was envisaged by terms of the contract and it was within
the contemplation of the parties and therefore it can be reasonably presumed
that such movement was to fulfill the terms of the contract. When it is so, it
has to be said that the goods moved from Malaysia as a part of single
transaction. Even if for the sake of argument, it is held that there are two
transactions of sale between MMRDA and consortium and the other between Scomi
Engineering, BHD Malaysia and consortium, then also the two transactions are so
connected integrally that they are inseparable. Therefore, we are not inclined
to accept the argument of Shri. Sonpal that conditions laid down in K.
Gopinathan Nair’s case are not satisfied in this case.”

Observing as above, the
Tribunal concurred with appellant that the sale is in course of import covered
by section 5(2) of CST Act.

Conclusion

The nature of sale in
course of import, more particularly when the facts are complex and there is no
express condition of import, is very delicate and required to be decided based
on judgments. The above judgment will be one more important judgment to throw
light on the subject and provide necessary guidance to trade and authorities. _

shailesh.kwebmaker

GST vis-a-vis Judgement under earlier Regime

Introduction

GST has been
introduced in our country from 1^st July 2017. Although the overall
design of GST scheme is new, it is a mixture of both the taxes i.e. tax on
Goods as well as tax on Services. In the earlier regime, the taxation of goods
was separate and service tax was separate, hence litigation was accordingly
with the respective laws. However, certain judgements under earlier laws may
still have their relevance in GST regime. Looking into present notifications on
classification and rate/s of tax, it seems that classification of a transaction
and rate of tax thereon is going to be one major area of confusion and/or
conflict, wherein such judgements may provide us necessary guidance.

Case study

Normally, there
can be five categories of transactions, to be dealt with to decide rate of tax.

(i) Whether
transaction is supply of goods or supply of service?

(ii) Whether
transaction is works contract?

(iii) Whether
transaction relates to treatment / process of goods of others?

(iv) Whether
transaction is mixed supply transaction?

(v) Whether
transaction is composite transaction?

Once the nature
of transaction is decided to be one of above, the rate can be decided
accordingly.

If the
transaction is relating to supply of goods, the rate will be as applicable to
said goods. If it is service transaction, the rate will be as applicable to
service.

Works
Contracts, under GST, are related to immovable properties and such transactions
are categorised as ‘service transactions’. At the same time ‘Treatment and
Processing’ transactions are also categoried as ‘service transactions’.

Once a
transaction is categorised as service transaction, then it will not be
necessary to look into any goods involved in supply of services. The
transaction should be taxed as service, as one transaction.

Blasting
transaction

In case of
blasting transaction, different chemicals and explosive materials are used for
blasting of land or rocks etc. It is seen that explosive materials are
taxable at 28% under GST, where as chemicals are taxable at 18%.

The first issue
in the above case will be to see the nature of blasting transaction. The nature
of blasting transaction has already been a subject matter of interpretation by
the Hon. Rajasthan High Court in case of Shekhawat Explosives vs. State
of Rajasthan and another (137 STC 326)(Raj). The facts narrated by the
High Court in the above judgment are as under:

“5. In any case, both the sides requested
us that the matter may be examined on merits also. We therefore, heard learned
counsel on the merits of the case. Learned counsel Sh. Mehta has argued that
the job-work, which was undertaken by the present appellant was that of
blasting and in this job of blasting the explosives were used, which stood
exhausted in the process of blasting itself. Therefore, there is no effective
sale of any explosive by the appellant so as to make it leviable for charging
the sales tax under the provisions of the Act and therefore, the order as has
been passed by the assessing officer was bad from very inception.”

The Rajasthan
Sales Tax Department’s argument was that there is transfer of property in goods
in the above transaction and hence it is liable as works contract.

The Hon. High
Court examined the issue and came to conclusion as under:

“The charging
section is section 4 under chapter II, i.e., levy of tax and its rate and it
has been clearly provided under sub-section (1) of section 4 that the tax
payable by the dealer under this Act shall be at single point in the series of
sales by successive dealers, as may be prescribed and shall be levied at such
rates not exceeding fifty per cent on the taxable turnover, as may be notified
by the State Government in the Official Gazette. A conjoint reading of the
provisions of section 2(38) and section 4(1) makes it clear that in such
matters when a job of blasting is undertaken, the use of explosives in such job
can neither be termed as sale within the meaning of the Rajasthan Sales Tax Act
nor it could be subjected to the levy of tax.

Learned counsel
Sh. Bhandari has argued before us, rather he was at pains to argue on the basis
of section 2(38), clause (ii) that it remains a case of sale because it
involved a transfer of property in goods and he submits that the explosives had
been purchased by the appellant on the basis of the form “C” supplied
by the department and on that basis he did avail certain concession. Even if
that be so, it will not give the status of sale to such process of extension.
Even if it is a case of transfer of property, though the property does not
stand transferred in any physical form, it stands exhausted in the process of
the execution of the works contract. Unless any transaction is given the status
of sale within the meaning of section 2(38), there is no question of charging
sales tax thereon. In case the appellant has made any misuse of the form
“C” and has wrongly availed any concession or has taken any undue
benefit or unlawful gain, which otherwise could not be available to him, it is
always open for the concerned authorities to take appropriate action against him
in accordance with law, but that does not mean that he could be made liable to
pay sales tax on such transaction (which does not amount to sale) on the basis
of which job of blasting was undertaken and completed and in the process
thereof the explosives were made use of.

6. We therefore, find that this appeal
must succeed on its own merits, the order dated November 24, 2001 passed by the
learned single Judge is set aside. This appeal as well as the writ petition are
allowed and the impugned assessment order dated September 29, 2001 (annexure 7)
is quashed and set aside.”

Conclusion

It can be seen
that the transaction of blasting is considered as not sale of any kind of goods
and therefore it becomes transaction of rendering service. The nature of
transaction will remain the same even under GST regime. The outcome is that the
blasting transaction will be taxable under GST as service transaction. Even if
goods involving different rates are used for rendering the above service, still
there will not be any impact of the same for deciding the rate of tax. Service
is one transaction and the rate will be attracted as per rate applicable to
service. Since for blasting transaction, no separate classification is made for
rate of tax, it will fall in residuary category and liable to GST at 18%.

There are several such
other judgements, in the old regime, which will be useful for appropriate
guidance in the GST regime.

shailesh.kwebmaker

Deposition in Investigation Proccedings – Binding effect

Introduction

Under fiscal
statutes, there are provisions for investigation. Such provisions were there
under Bombay Sales Tax Act, 1959 also.

Normally, when investigation action takes place, a statement (also referred to as deposition) is recorded during the course of investigation. The intention of such deposition is to get the facts recorded which can be used further for assessments and for raising liability, if applicable. However, practical experience shows that under heavy pressure and threats, etc., the contents get recorded (admitted) in favour of revenue. In other words, the concerned dealer/party is forcibly made to admit tax evasion and thus commitment is taken for discharging the liability.

The issue arises whether such statement is binding in the course of assessment.

There are various instances where the parties have retracted the statements and judiciary has approved such retraction. Normally, such retraction is required to be done immediately and as early as possible after giving the statement. It should also be supported by reasonable ground for retraction. However, in spite of above general position, it can still be said that the statement given during investigation is not binding, if by circumstances and facts, it can be shown that the statement is factually incorrect. And under such circumstances, even late retraction or no retraction is also not an issue. In other words, inspite of admission in statement or deposition, if the factual position is shown to be different with satisfactory supporting, then the judiciary will certainly take into account such a changed position.

Judgement in case of Trilok Enterprises (VAT SA No.136 to 138 of 2011 dt.19.7.2017).

Recently, Hon. M.S.T. Tribunal had an occasion to deal with such an issue in above judgement. The facts as recorded by the Tribunal are as under:

“2. The appellant, a person not registered under Bombay Sales Tax Act, 1959 was visited by officers of Enforcement Branch, Mumbai on 21.01.1997. During the visit, no books of accounts found, however, details of Bank transactions were found which show that during 1994-95, 1995-96 and 1996-97, large amounts were deposited and withdrawn from the bank account. A statement of the appellant was obtained by Enforcement Officer. In this statement the appellant, viz. Bharat Deepchand Vora, proprietor of M/s.Trilok Enterprises, appears to have admitted that he has done trading with M/s. Gurjar Steel, so also business on commission basis in Iron and Steel during that period. The rate of commission is stated as 10 paise. The enforcement branch, treating the appellant as unregistered dealer, issued him notices for assessment for those three years period. The appellant is assessed on the basis of a statement of sales, furnished by him. The appellant appears to have filed return and deposited some tax with the same. The assessment orders were challenged by the appellant before the 1st Appellate authority. Main contention of the appellant was that, he has not done any business of sales and purchases, during those periods. The First appellate authority, vide its order dated 17.6.2000, had been pleased to set aside the assessment orders and remanded the matters to assessing authority, with a direction to assess the appellant afresh. On remand, it is stated, that the assessing officer gave opportunity of hearing to the appellant, and again he has passed identical assessment orders, as per earlier orders passed by him. The appellant appears to have maintained his stand in reassessment after remand that he has not done any business of buying and selling during relevant period. The assessing officer however, has assessed the appellant on the basis of record available before him and he has levied tax, interest and penalty. Against that order, passed after remand, the appellant had filed first appeal, which was dismissed on merit, by the first appellate authority, by the order impugned by the appellant in the instant appeal.”

On merits, on behalf of appellant, it was argued that the party has not done any business of sale/purchase but only financial transactions. It was argued that no sales or purchases have been established. It was further argued that mere statement before the officer of Enforcement cannot be allowed to form a basis for determining sales/purchase transaction particularly in absence of other cogent, reliable and trustworthy evidence. It was further brought to notice of Tribunal that the statement was obtained under threat. The returns filing and payments were also under threat of prosecution.

On behalf of the Revenue, the star argument was that since the appellant himself has admitted sale/purchase in the deposition and by filing returns and payment, there was no need for revenue to further bring any supporting material.

Hon. Tribunal examined the factual position vis-à-vis legal position. In para 15 & 16, Hon. Tribunal made remarks about the effect of deposition. The relevant paras are reproduced for ready reference.

“15. Now if we carefully look at this statement and the statement made by the appellant before the visiting officer at the time of visit admittedly books of accounts were not found. Firstly it is unlikely that a dealer having such a volume of trading would not maintain any books of accounts. Further he certainly does not know the changes in the rate of tax S. S. Patta from 1% to 4% and it is unlikely that he would calculate the interest exactly up to the date, and would show that the same is payable. Thus, though it is signed by the appellant, in all probability, it is a statement prepared by somebody else and not by the appellant and signature of the appellant appears to have been obtained on the same.

16. If we look at the bank statement available on record, it will be seen that firstly there has been no attempt to match the same with the list of bills mentioned above. Secondly, it is seen, that the appellant has deposited amounts in cash and has issued cheques to M/s.Gurjar Steel. In this statement before investigating officer, he had stated that he was dealing with Gurjar Steel. If cheques are issued to Gurjar Steel, at the most there could have been purchases from Gurjar Steel, who was a registered dealer. Admittedly bank account of Gurjar Steel was provisionally attached by the department for recovery of the dues, but subsequently the attachment was withdrawn. If the appellant had made payment by cheques to Gurjar Steel, who is registered dealer, there was no reason for not showing these transactions as purchases as that would have been instances of resale in the hands of appellant and would not have attracted any liability for payment of tax. It does not appear from the record that department has made any attempt to confirm the genuineness of the transactions from M/s. Gurjar Steel or from any other party, despite the fact that matter was remanded back by the first appellate authority with direction to bring additional material on record to establish the factum of sales. The assessing officer, without considering these directions appears to have passed same order on remand.”

In para 19, the Hon. Tribunal has made reference to judgement of the Hon. Supreme Court about relevance of statement, in the following words.

“19. In CBI vs. V. C. Shukla and others (1988) 3 SCC 410, Hon’ble S. C. while speaking about relevancy of evidence u/s.34 of Evidence Act has observed, that first part of section 34 speaks about relevance of entry in the books of account as evidence, and the second part speaks in a negative way, of its evidentiary value for charging a person with a liability. To make an entry relevant thereunder it must be shown that it has been made in a book, that book is book of account and that books of account has been regularly kept in the course of business. Even if, the above requirements are fulfilled and the entry becomes admissible as relevant evidence, still the statement made therein shall not alone be sufficient to accept it as substantive evidence to charge any person with liability of paying tax.”

Observing that there is no independent evidence gathered by the revenue to establish sale/purchase transactions, the Tribunal held that the levy of sales tax on alleged sales in instant appeal is unsustainable. Accordingly, the Tribunal allowed the appeals by quashing assessment orders.

CONCLUSION
The above legal position laid down by the Tribunal will also be relevant under other fiscal laws. The sum and substance is that the tax can be levied only if there are established taxable transactions and not merely on admission. Therefore, in due cases, the parties are entitled to demonstrate their non-liability inspite of any wrong admission made in assessment or in investigation proceeding. Ultimately, the correct legal position will prevail. _

shailesh.kwebmaker

Sale Vis-À-Vis Service Qua Treatment In Hospital

Introduction

In pre GST era, whether a particular
transaction is sale or service has always remained debatable issue. There are a
number of judgements involving the above controversy. Recently, in Maharashtra,
there arose a controversy about nature of transaction in treatment of in-house
patients in a hospital. In hospital, when the patient is admitted, he is given
medical treatment. The treatment includes services of doctors as well as giving
medicines as may be required. In this transparent era, normally, hospitals show
charges towards medicines separately and other charges like bed charges, room
charges etc., separately. Although, this entire in-house treatment is
generally considered as single transaction of service, thus not liable for VAT.
But, in case of Saifee Hospital, while deciding first appeal, the
first appellate authority took a view that the receipts toward medicines are
liable to tax under MVAT Act. Similarly, estimations were made towards food
supply out of composite charges for room. There were also receipts towards
special beds and mattresses. These charges were also held to be liable to VAT
under ‘Transfer of right to use goods’.

Against the above first appeal order, second
appeal was filed before Hon. M.S.T. Tribunal. Hon. Tribunal has recently delivered
judgment in case of Saifee Hospital (Second Appeal No.190 of 2016 dated
8.12.2017).

Issues raised by
first appeal order

The
Hon. Tribunal has noted that the following issues are raised by the first
appellate authority and after giving hearing, the first appellate authority
held them as liable to tax under MVAT Act.

“According to the first appellate authority,
the following transactions were liable to tax,

1) The supply of drugs and
medicines and other surgical goods effected by pharmacy/drugstore to indoor
admitted patients, is a sale liable to VAT.

2) Provision of food in hospital to admitted patients received in
the composite charges received from patients for the bed charges is a sale of
food and liable to VAT.

3) Supply of dental materials/implants
by dental Department is a sale liable to VAT.

4) Hire charges for mattresses
are liable to VAT.

5) Provisions of goods like
special beds and equipments where hire charges have been received from patients
is deemed sale in the nature of transfer of right to use any goods.”

Arguments on
behalf of the appellant

The Hon. Tribunal has noted the submissions
made by the appellant in detail. The indicative grounds of appeal are as under:

1. On introduction of VAT,
specific query was made with the Commissioner of Sales Tax about liability of
tax on medicines administered to in-patients for treatment.

The Commissioner of Sales
Tax, vide letter dated 26.12.2007, has clearly stated that the dominant
intention in administering medicines to in-patients is treatment of diseases
and not supply/sale of medicines consumables or implants.

2. The department has further
issued circular no.7A of 2008 dated 13.3.2008, wherein also, following BSNL,
same position is reiterated.

3. Even if pharmacy from where
medicines are supplied is owned by hospital, so far as supply of medicines for
treatment to in-patients is concerned it is not sale. So far as sale by
pharmacy over counter to outpatients or general public is concerned, it is
considered as sale under MVAT Act and due VAT has been discharged.

4. Various judgements on very
same issue were cited like:

(a) Dr. Hemendra Surana (90 STC
251) wherein it is held that taking x-ray and giving report is not a works
contract activity.

(b) Bharat Sanchar Nigam Ltd. (145 STC 91)(SC), where it is observed
that medicines provided by doctor/hospital is not sale.

(c) International Hospital Pvt.
Ltd. (Writ Tax No. 68 of 2014 decided on 6.2.2014) in which use of stents for
treatment of patient is held as not amounting to sale.

(d) Tata Main Hospital (2208
NTN Vol-36 149) and Fortis Healthcare (CWP 1922 to 1924 of 2012 dated
23.1.2015).

In the above judgements, the respective High
Courts have held that treatment of in-house patients is not amounting to
sale.

5. Even the extended meaning
of ‘sale’ under Article 366 (29A) does not cover such services. Various
judgements were cited in support of the same.

6. In relation to charging the
medicines at MRP used for in-patient, it was contended that there is no tax
collection. Reliance was placed on the judgement of Hon. Supreme Court in case
of Hindustan Lever Ltd. (93 VST 452).

Arguments on
behalf of Department

Supporting the order of the first appellate
authority, the department made elaborative arguments. Indicative arguments are
noted as under:

(1) In pharmacy, there is common stock and there is no difference
between supplying medicines over the counter and supplied for treatment of
in-patient.

(2) To show sales of goods,
Department also cited instances that the patients take away unused medicines
with them while taking discharge.

(3) Judgements cited, including
BSNL were tried to be distinguished on ground that they relate to composite
transaction sand not the one where sale is discernible.

(4) The judgments relating to
medicine services were also tried to be distinguished on ground that the facts
were different, mainly that there was no sale from pharmacy owned by very same
hospital.

(5) Judgements of Kerala High
Court in case of Malankara Orthodox Syrian Church (135 STC 224)(Ker) and
PRS Hospital vs. State of Kerala, 2003 (11) KTR 176 were relied
upon. In those judgements, based on facts and legal position under respective
Act, the activity of Hospital was held as covered by Sales Tax Acts.

(6) The arguments were also
made to treat these transactions as deemed sales by Works Contract or transaction
of hotel service on ground there is transfer of medicines/food for human
consumption.

(7) The provisions of MRP/Drug
Price Control Order relied upon to suggest that the prices are inclusive of
tax. It was contended that tax is collected which cannot be allowed to be
retained by hospital.

The Hon. Tribunal has analysed arguments
from both sides in elaborate manner.

The Hon. Tribunal held that the basic nature
of transaction is of rendition of services. The intention of parties is not to
sell/purchase medicines, but to be administered by doctors in course of
treatment.

The Hon. Tribunal examined position whether
there is discernible sale or not, in following words.

“44. The next question is whether the supply
of medicine in the course of treatment are discernible sale so as to attract
the main definition of sale i.e. sale as per the Sales of Goods Act. The
Appellant Officer in para 116 of his order remarks that intention of private
hospital is to sell the medicine and earn profit. This may be so, but whether
the patient intends to purchase medicine when admitted to hospital? Even in a
composite contract, for a sale to be discernible, it must satisfy all the
criteria for sale as per sale of goods Act. In Gannon Dunkerley (8 STC) the concept
of sale has been discussed.

In para 16 the Court has said :

“.. In order to constitute a sale, it is
necessary that there should be an agreement between the parties for the purpose
of transferring goods which of course presupposes capacity to contract, that it
must be supported by money consideration and that as a result of the
transaction property must actually pass in goods. Unless all these elements are
present, there can be no sale.”

“We are accordingly of the opinion that on
true interpretation of expression ‘sale of goods’ there must be an agreement
between the parties for the sale of very goods in which property eventually
passes.”

45.Thus, when a patient is admitted to
hospital, his intention is not to buy medicines, nor the medicines identified
or agreed to be delivered to patient before administering the same during
course of the treatment. It is not correct to say that as soon as bills are
prepared by pharmacy, the goods are ascertained and delivered to the patients.
These bills to inpatient according to appellate authority himself, are as per
requirement of DCPO and for the purpose of books to be maintained according to
DCPO. In large organisations, which to an outsider is single entity, there may
be internal divisions incorporating the concept of profit centre for each
division. Such divisions do not make them a separate entity from the single
whole for transaction with outside person. Internal dynamism may allow pharmacy
to operate as a profit Centre, treating everything issued from it same as any
other sale, but that does not make it a sale same as over the counter sale to
customer. The fact that billing from over the counter and to a patient in same
and same price is charged also does not make it different. In a restaurant,
there may be sale from counter as well as service. The billing may be same and
even price may be same for the both
types of sales, yet first is sale simplicitor and second is a deemed sale.”

The Tribunal refuted each and every argument
of department by giving elaborate explanation.

The argument that it can be deemed sale
under clauses 366(29A) is also rejected.

It is held that the circular issued by
Commissioner of Sales Tax is binding. It is also held that though charges for
medicines are at MRP, there is no collection of tax but it is price.

The Hon. Tribunal thus concurred with
appellant hospital and set aside the order of first appellate authority.

In respect of argument about charges for
special bed etc. also the Tribunal held that there is no lease
transaction. The patient cannot take such goods outside. Therefore, there is no
lease sale in respect of such goods also.

Similarly, there cannot be tax on food
included in room rent as it is not separable nor provided for in Rules. Rule 59
of MVAT Rules is meant for hotels and not for hospitals. Tribunal deleted such
levy also.

Finally, the Hon. Tribunal allowed appeal in
favour of appellant in all respects.

Conclusion

The judgement will definitely give respite
to worried hospitals. The Hon. Tribunal has set guidelines for levying tax
under MVAT Act. This judgement will be useful in various other situations. _

shailesh.kwebmaker

Sale In Course Of Export U/S. 5(3) – An Update

Introduction

Under
VAT era, import and export transactions were exempted from levy of sales tax
(Vat). The export transaction is defined in section 5(1) of the CST Act.
However, section 5(1) granted exemption to direct export sale. Therefore, the
sale prior to export i.e. penultimate sale was deprived of exemption as export.

To
mitigate the said issue section 5(3) was inserted. The said sub-section is
reproduced below for ready reference.

“S.5. When is a sale or
purchase of goods said to take place in the course of import or export. –

(3)
Notwithstanding anything contained in sub-section (1), the last sale or
purchase of any goods preceding the sale or purchase occasioning the export of
those goods out of the territory of India shall also be deemed to be in the
course of such export, if such last sale or purchase took place after, and was
for the purpose of complying with, the agreement or order for or in relation to
such export.”

Thus
one sale prior to export is also exempt. However, the real issue is
interpretation of the scope of said sub-section.

Till
today, there are a number of judgements on this issue. However, still it cannot
be said that the issue is fully resolved.

Recent judgement

Recently
Hon. Kerala High Court had an occasion to decide one such issue about scope of
section 5(3) in case of Gupta Enterprises vs. Commercial Tax Officer,
Munnar and Ors. [2018] 48 GSTR 252 (Kerala).

The
petitioner was purchasing goods in auction and was objecting to charging of tax
on him by seller on ground that his purchase i.e. corresponding sale by seller
to him is covered by section 5(3) and no tax is applicable. Not able to
succeed, this petition was filed.

Facts
of case, as narrated by High Court, are as under:

“3. The appellant filed
W.P. (C). No. 6210/2005 inter alia contending that he is an exporter of
sandalwood and on receipt of prior orders and satisfying the same, he attended
the auction held by the respondents. The sale was eventually confirmed in his
favour. He was called upon to pay the entire sales tax along with the balance
amount. He replied that the transaction is exempted u/s. 5(3) of the Central
Sales Tax and sought for release of the goods against his furnishing bank
guarantee. The authorities refused to release the goods. But the respondents
insisted on payment of tax before the goods are released. Placing reliance on
the decision of the Madras High Court in W.A. Nos. 94 to 96/2000 it was
contended that the demand is against the dictum laid down in the said decision
and being aggrieved by the insistence of the Sales Tax Authorities, writ
petition was filed for the following reliefs:

(i) Issue a writ of mandamus
directing respondents 3 and 4 to release the goods purchased vide Ext. P. 3
without collecting sales tax and on the petitioner furnishing documents in
support of claim of exemption u/s. 5(3) of the CST Act and on the petitioner
paying the amount due under the auction,

(ii) Direct respondents 3 and 4
to release the goods without collection of sale tax land on the petitioner
furnishing bank guarantee for the entire tax amount pending adjudication on
sales tax exemption by the 2^ndrespondent and other consequential
reliefs.”

The
issue which arose was, whether the purchase of sandalwood was in course of
export u/s. 5(3). If goods purchased are exported in same form then the
exemption is invariably allowable. However, where goods purchased are processed
then question of integrated connection between export and prior purchase
arises. If no integrated connection or inextricable link is proved, the prior
transaction cannot fall u/s. 5(3). Hon. Kerala High Court referred to
historical background about interpretation of this section and then arrived at
conclusion.

The
observations of High Court are as under:

“7. The learned Single Judge after referring to the relevant provisions of
the Foreign Trade (Development and Regulation) Act, 1992, (FDTR Act), held that
while export of sandalwood can be only in such forms permitted by the DGFT,
there can be no export of sandalwood in any other form. Any export of
sandalwood except in the forms permitted by the DGFT would be an illegal export
contravening the provisions of the FTDR Act and the Customs Act. Placing
reliance on Ext. R. 3(a) addressed by the Zonal Joint DGFT to the Conservator
of Forests and Ext. R. 3(b) public notice issued by the DGFT in exercise of the
powers under “exim policy” show that sandalwood is not covered by
open General Licence, but one falling under the restricted list for which an
exporter has to make specific request for licence to DGFT, who releases quota
from time to time and that the categories of Sandalwood allowed for export are
“sandalwood chip class” in the form of heart wood chips upto 50
grams, mixed chips upto 50 grams, flakes upto 20 grams of the sandalwood
classes (Jajpokal I class, Jajpokal II class, Antibagar, Cheria Milvanthilta,
Basolabjukni, saw dust, charred billets), sandalwood chips/power sandalwood
dust obtained as waste after the manufacturing process and sandalwood in any
other form as approved by the Exim Facilitation Committee in the Directorate
General of Foreign Trade. Ext. P. 18 export licence was also issued to the
petitioner under the FTDR Act and licence to export is granted only for the
categories mentioned therein. The learned Single Judge also entered a positive
finding after referring to Ext. P. 18 export licence issued to the petitioner
under the FTDR Act that licence to export is granted only for the categories
mentioned therein, namely, sandalwood in the form of heart wood chips upto 50
grams, mixed chips not exceeding 30 grams and flakes upto 20 grams of the
sandalwood classes, Jajpokal I class, Jajpokal II class, Antibagar, Cheria
Milvachilta, Basolabukhi, saw dust, charred billets, sandalwood power, dust,
chips and flakes.

The
petitioner placed reliance on Ext. P. 17, the rules regarding selection,
cleaning, classification and disposal of sandalwood etc. issued by the
Tamil Nadu Forest Department and it was contended based on Ext. P. 17 that
various classes of sandalwood are described in Ext. P. 17 and it will be seen
therefrom that the classification is purely on the basis of weight of billets,
defects noticed in the billets and the length of the billets etc. and
these are not different types or varieties of sandalwood. The learned Single
Judge exhaustively referred to various items in Ext. P. 17 and found that the
classification of sandalwood as per Ext. P. 17 when juxtaposed with the
documents evidencing the items bid by the petitioner, as evidenced by different
documents and were put in a tabular form in paragraph 22 of the judgement. It
was concluded that export orders of foreign buyers produced by the petitioner
evidenced that they were only sandalwood chips, below 50 grams.

After
referring to the various materials as noticed above, the learned Single Judge
found that on facts the sandalwood as purchased by the petitioner from the
Forest Department is in the form of billets, roots, or even chips weighing over
50 grams, could not have been exported in consonance with exim policy and the
export licence, without converting the same into chips of the description
covered by the export licence.

There
is a prohibition, in law, for export of sandalwood in any form, other than that
permitted under the exim policy and the export licence, with an order releasing
quota for the export. So much so, the sandalwood purchased form the Forest
Department as billets, roots etc. had to be converted into flakes, power
etc. weighing below not more than 50 grams to make them exportable
goods. In commercial parlance, the goods prohibited from being exported stood
converted to exportable goods. It is also held that for the purpose of section
5(3), what is relevant for consideration is whether the goods that formed the
subject matter of the penultimate sale or purchase are the self-same goods that
are exported and in the light of the decision in Sterling Foods vs. State of
Karnataka (MANU/SC/0423/1986 :

(1986)
3 SCC 469) of the Apex Court, the words “those goods” in section 5(3)
are clearly referable to “any goods” mentioned in the preceding part
of that sub-section and it is, therefore, obvious that the goods purchased by
the exporter and the goods exported by him must be the same. On the other hand,
in the present case the goods purchased by the assessee from the Forest
Department are those which were incapable of being exported in terms of the
relevant laws. The only types of goods that can be exported as sandalwood are
those which fall under the categories permitted for export. Hence, the goods
purchased by the petitioner from the Forest Department had to undergo the
change from the commercial status of non-exportable goods to that of exportable
goods, by change in its form from billets, roots etc. to flakes of the
dimension or as dust, permitted for export, in terms of the laws relating to
export. Thus, there occurs a conversion of the goods purchased so as to facilitate
the export and as such ceased to be “such goods” which were purchased
from the Forest Department. Hence, the claim for exemption u/s. 5(3) of the CST
Act was negatived.

Though
the appellant placed reliance on the decision of the Apex Court in Consolidated
Coffee vs. Coffee Board, Bangalore (AIR 1980 SC 1403), the learned Single
Judge accepted that merely on the basis
of the condition of sale notice, one could not be compelled to pay tax provided
the exemption applies. But the decision in W.A. Nos. 94 to 96/2000 of the
Madras High Court, which in turn referred to the case of Consolidated Coffee’s
case (supra) did not support the case of the petitioner on the issue
regarding the identity of the goods to be found among that purchased and those
exported. In the Madras decision the goods purchased by the appellant therein
(petitioner herein) were contended to be different from the goods sought to
export. But the said contention was not pursued further by the Tamil Nadu
Government.

The
different varieties of sandalwood purchased by the appellant were reduced to
small pieces for the purpose of export, though noticed by the court in the said
decision, none of the decisions on which reliance was placed by the learned
Single Judge, were referred to and there was no serious argument raised by the
State of Tamil Nadu in that regard and it was in such circumstances that the
Court accepted the assessee’s case therein.”

Further
para 9 reads as under:

“9. It was then contended by the learned
counsel that the Apex Court in the decision reported in State of Karnataka
vs. Azad Coach Builders Pvt. Ltd. (MANU/SC/8024/2006

: (2006) 145 STC 176), has
doubted the correctness of the decision in Sterling Food’s case
(MANU/SC/0423/1986 : (1986) 3 SCC 469) and also the decision in Vijayalaxmi
Cashew Company’s case ((MANU/SC/1015/1996 : (1996) 1 SCC 468), and has referred
the case to a larger Bench. It is true, the Court observed, that the said
decisions need reconsideration and the matter is placed before the larger
Bench. In the above case M/s. Tata the exporter and also a manufacturer of
chassis had a pre-existing order of export of ‘Buses”. The chassis were
moved under customs bond for body building and export to the premises of the
assessee (Bus body builder).

The
assessee then delivers the completed bus which is moved under the bond directly
to the port and exported, so that chain never breaks. The question arose was
whether in such circumstances the bus body builder is entitled to claim the
benefit u/s. 5(3) of the CST Act. It is in that context the Apex Court
considered the expression “in relation to such exports” which did not
get due weightage in the earlier decision.

But
even in the said case, the assessee only contended that the test of “the
same goods” is evolved only to explain that the exporter should not have
undertaken any process to change the identity of the goods brought by him in
order to confer the benefit of exemption on the penultimate sale. Thus there
was no dispute that if the goods undergo changes in the hands of the exporter
after the purchase and before export, he will not be entitled to claim the
benefit of section 5(3) of the CST Act, which is the main issue in the present
case. Be that as it may until a final decision is rendered by the Apex Court pursuant
to the reference order in State of Karnataka vs. Azad Coach Builders Pvt.
Ltd. (MANU/SC/8024/2006 : (2006) 145 STC 176), the decision in Sterling
Food’s case and Vijayalaxmi Cashew Company’s case beholds the field as a
binding precedent under Article 141 of the Constitution of India.”

Observing
as above Hon. High Court rejected claim of section 5(3).

Conclusion

The
judgement is well reasoned to understand the scope of section 5(3) of CST Act
and more particularly, the effect of judgment of Supreme Court in case of State
of Karnataka vs. Azad Coach Builders Pvt. Ltd. (145 STC 176)(SC).

We
hope above will be a guiding judgement for deciding further cases.

shailesh.kwebmaker

Works Contract Under GSTvis-a-vis Plant and Machinery

Introduction

Under earlier regime, the
term ‘works contact’ had a wide meaning. Whether the contract related to
immovable property or movable property, any contract, if involved in both
supply of goods as well as supply of services, it used to be referred to as
works contract.

But, under GST, there is
defined meaning of ‘works contract’ and the scope of the term ‘works contract’
is narrowed down. The definition of ‘works contract’, as given in section
2(119) of the CGST Act, is reproduced below for reference.

“(119) “works contract”
means a contract for building, construction, fabrication, completion, erection,
installation, fitting out, improvement, modification, repair, maintenance,
renovation, alteration or commissioning of any immovable property wherein
transfer of property in goods (whether as goods or in some other form) is
involved in the execution of such contract;”

It can be seen, from the
above definition, that now only those contracts (for supply of goods and
services as specified) will be treated as ‘works contract’ which are relating
to immovable property.

In other words, if the
transaction of supply of goods and services is relating to movable property, it
will not be a ‘works contract’.

Situation of Plant and
machinery

Plant and machinery, which
is installed in a factory, can also be covered in the scope of works contract,
if the upcoming plant and machinery is in the nature of immovable property.
Whether upcoming plant and machinery is movable property or immovable property
may be a debatable issue and it will depend upon the facts of each case.

There are different
judgments laying down criteria for deciding the nature of plant and machinery.

Sirpur Paper Mills Ltd. vs. Collector of
Central Excise, Hyderabad (1998 (1) SCC 400).

In this case, the issue
arose whether Paper Mill is movable property or immovable property. Hon’ble
Supreme Court has observed as under;

“In view of this finding of
fact, it is not possible to hold that the machinery assembled and erected by
the appellant at its factory site was immovable property as something attached
to earth like a building or a tree. The tribunal has pointed out that it was
for the operational efficiency of the machine that it was attached to earth. If
the appellant wanted to sell the paper making machine it could always remove it
from its base and sell it. Apart from this finding of fact made by the
Tribunal, the point advanced on behalf of the appellant, that whatever is
embedded in earth must be treated as immovable property is basically not sound.
For example, a factory owner or a house-holder may purchase a water pump and
fix it on a cement base for operational efficiency and also for security. That
will not make the water pump an item of immovable property. Some of the
component of water pump may even be assembled on site. That too will not make
any difference to the principle. The test is whether the paper making machine
can be sold in the market. The Tribunal has found as a fact that it can be
sold. In view of that finding, we are unable to uphold the contention of the
appellant that the machine must be treated as a part of the immovable property
of the company. Just because a plant and machinery are fixed in the earth for
better functioning, it does not automatically become an immovable property. A
further argument was made that the entire machinery as it is cannot be bought
and sold because the machinery will have to be dismantled before being sold.
The Tribunal has pointed out that the appellant had himself bought several
items and completed the machinery. It had purchased a large number of
components and fabricated a few and manufactured the paper making machine at
site. If it is sold it has to be dismantled and reassembled at another site. We
do not find any fault with the reasoning of the Tribunal on this aspect of the
matter.”

Thus, on the given facts,
Hon. Supreme Court has held the plant and machinery of the mill is movable
property.

Duncans Industries
Ltd. vs. State Of U.P. & Ors JT 1999
9 SC 421 on 3 December, 1999

This is a subsequent case,
wherein again Hon. Supreme Court had an occasion to decide the nature of plant
and machinery installed in the factory. The relevant observations are as under:

“Therefore, it came to the
conclusion that these machineries were immovable property which were
permanently attached to the land in question. While coming to this conclusion
the learned Judge relied upon the observations found in the case of Reynolds
vs. Ashby & Son (1904 AC 466) and Official Liquidator vs. Sri
Krishna Deo & Ors. (AIR 1959 All. 247). We are inclined to agree with
the above finding of the High Court that the plant and machinery in the instant
case are immovable properties. The question whether a machinery which is
embedded in the earth is movable property or an immovable property, depends
upon the facts and circumstances of each case. Primarily, the court will have
to take into consideration the intention of the parties when it decided to
embed the machinery, whether such embedment was intended to be temporary or
permanent. A careful perusal of the agreement of sale and the conveyance deed
along with the attendant circumstances and taking into consideration the nature
of machineries involved clearly shows that the machineries which have been embedded
in the earth to constitute a fertiliser plant in the instant case, are
definitely embedded permanently with a view to utilise the same as a fertiliser
plant. The description of the machines as seen in the Schedule attached to the
deed of conveyance also shows without any doubt that they were set up
permanently in the land in question with a view to operate a fertiliser plant
and the same was not embedded to dismantle and remove the same for the purpose
of sale as machinery at any point of time. The facts as could be found also
show that the purpose for which these machines were embedded was to use the
plant as a factory for the manufacture of fertiliser at various stages of its
production. Hence, the contention that these machines should be treated as movables
cannot be accepted.”

Thus, in this case the Hon.
Supreme Court has considered the installed plant and machinery as immovable
property.

Conclusion

If the transaction of
installation of plant and machinery is considered to be immovable property, the
transaction will be ‘works contract’ and therefore it will be treated as a
transaction of supply of service under GST Act.

Thus, being a service
transaction, the tax will be attracted as one transaction of supply of service.

However, if the transaction
is considered to be for movable property, it will be a transaction of ‘mixed
supply’ or ‘composite supply’ and tax rate will be decided accordingly.

Thus, determination of
nature of transition of installation of plant and machinery is very much
relevant for deciding the correct rate applicable under GST. _

shailesh.kwebmaker

Sale Of Composite Package Vis-À-Vis Levy Of Tax On Component Of Package – Legality

Introduction

Under
VAT laws, tax can be levied on sale of ‘goods’. What is ‘goods’ is always a
question of facts. However, a very peculiar situation arose in taxation under
VAT era.

Normally
when a package is sold, it is considered as single ‘goods’ for levy of tax. The
rate of tax is applied as per rate applicable to goods sold by such package.
The situation was thus very simple and straight.

But,
the Judgement in State of Punjab vs. Nokia India Pvt. Ltd. (77 VST
427)(SC) has brought in a different aspect. In this case, battery of
mobile was sold along with mobile as one unit and tax rate applicable to mobile
i.e. 5% was charged. However, when the battery was sold separately, it was
considered as liable to tax @ 12.5% as other goods.

Hon.
Supreme Court held that, even if battery is sold as one unit with mobile still
the tax on the value of battery should be at 12.5%. Thus, the price was
separated into two rates. This has created many issues in taxation under VAT
era.

Allahabad High Court judgement

Recently
Hon. Allahabad High Court had an occasion to deal with ratio of above
judgement.

The
facts, as narrated by Hon. High Court in case of Samsung (India)
Electronics vs. Commissioner of Commercial Taxes, U.P. (57 GSTR 1) (All)
are as under:

“The
seminal issue which arises in this batch of revisions is whether a mobile
charger when sold as part of a composite package comprising the said article as
well as a mobile phone is liable to be taxed separately treating it to be an
unclassified item under the provisions of the U.P. VAT Act 20081. The issue
itself has arisen consequent to the Department taking the position that the
charger is liable to be taxed separately in light of the decision rendered by
the Supreme Court in State of Punjab Vs. Nokia India Pvt Ltd2. The principal
questions of law as framed and upon which the rival submissions centered read
thus:

“A.
Whether the Tribunal ought to have held that the entire composite set having a
mobile phone and mobile charger having a single MRP was liable to assessed to a
single classification under Entry No. 28 of Schedule-II, Part B of the Act?

B. Whether the Tribunal erred in applying the
judgment dated 17.12.2014 by the Hon’ble Supreme Court, in the case of State of
Punjab V. Nokia Private Limited, to the Applicant’s facts and circumstances and
in view of the fact that Entry No.28 of Schedule-II, Part-B of the Act reads
differently from the entry considered by the Hon’ble Supreme Court?”

This
revision has called in question an order of the Tribunal dated 12^th
January 2017 which has affirmed the view taken by the assessing authority that
the charger although sold as part of a composite package was not liable to be
taxed at the rate of 5% as contemplated under Entry-28 appearing in Part-B of
Schedule-II but as an accessory and therefore liable to be treated as an unclassified item and chargeable to tax @
14%. The relevant entry of the Schedule reads as follows:-

“Cell
phones and its parts but excluding cell phone with MRP exceeding Rs.
10,000/-.”

Both the
assessing authority as well as the Tribunal have rested their decisions on the
judgement of the Supreme Court in Nokia to hold that a charger is liable
to be treated and viewed as an accessory and not an integral part of the mobile
phone. It is in the above backdrop that these revisions have travelled to this
Court.”

Contentions

On
behalf of dealer it was submitted that the ratio of Nokia cannot be
applied when it is composite one package and assumption of separate sale of
charger as an accessory is not permissible.

The
prime submission was that facts in case of Nokia before Supreme Court
were different. It was further submitted that there was no intent to affect a
separate sale of charger and that on an application of the dominant intention
test it would clearly be evident that the charger could not have been taxed
separately. It was the submission that the sale of the charger along with the
mobile phone in a composite package would fall within the specie of a composite
contract and therefore, tax could have been levied only in terms of Entry-28 as
one goods.

It
was explained that since the composite package carried and bore a single MRP,
it was not permissible for the respondents to levy tax separately on the
charger and the mobile phone.

In
addition, other judgements rendered with reference to above Nokia
judgment were brought to notice of High Court as well as Circular issued by
Central Government clarifying upon judgement of Nokia, was also cited.

On
behalf of Department, amongst others, the main thrust was that the ratio of
judgement in Nokia is applicable.

Judgements
were cited to stress that charger is accessory and hence liable at separate
rate.

Holding of High Court

Hon.
High Court analysed judgement in Nokia and about principles of
applicability of judgment of Hon. Supreme Court. It is observed as under:

“From
the aforesaid authorities, it is quite vivid that a ratio of a judgement has
the precedential value and it is obligatory on the part of the Court to cogitate
on the judgement regard being had to the facts exposited therein and the
context in which the questions had arisen and the law has been declared. It is
also necessary to read the judgement in entirety and if any principle has been
laid down, it has to be considered keeping in view the questions that arose for
consideration in the case.

One
is not expected to pick up a word or a sentence from a judgement de hors
from the context and understand the ratio decidendi which has the
precedential value. That apart, the Court before whom an authority is cited is
required to consider what has been decided therein but not what can be deduced
by following a syllogistic process.” (emphasis supplied) As has been
succinctly explained in the decisions noticed above, the ratio is the principle
deducible from the application of the law to the facts of a particular case and
it is this which constitutes the true ratio decidendi of the judgement.

Each
and every conclusion or finding recorded in a judgement is not the law
declared. The law declared is the principle which emerges on the reading of the
judgment as a whole in light of the questions raised. It is on these basic
principles that the Court proceeds to ascertain the ratio decidendi of Nokia.”

Regarding
facts in Nokia vis-à-vis Present case before it, Hon. High Court
observed as under:

“A
careful reading of the entire decision establishes beyond doubt that the Court
found that a charger and mobile phone are not composite goods. This evidently because
a charger cannot possibly be recognised as an integral part or constituent of a
mobile phone. A mobile phone is not an amalgam of various products and a
charger. Since the submission advanced before the Court was that these were
composite goods, the Supreme Court proceeded to recognise a charger to be an
accessory to a mobile phone.

The
contention which is urged before this Court namely that the sale of the mobile
phone along with its charger in a single retail package constitutes a composite
contract and requires the application of the dominant intention test was
neither urged nor considered by the Supreme Court. The Supreme Court
consequently in Nokia did not record any finding nor did it declare the law to
be that the sale of a mobile phone and its charger in a single retail package
would not constitute a composite contract.

On an
overall consideration of the aforesaid aspects, this Court finds itself unable
to hold that Nokia is a precedent at all on the question of a composite contract being subjected to tax.”

Hon.
High Court ultimately decided issue in favour of dealer by observing as under:

“Proceeding
then to the doctrine of “dominant intention” or the “dominant
nature” test [as the Supreme Court chose to describe it in BSNL], what it
basically bids the Court to do is to identify and recognise the “substance
of the contract” and the true intent of parties. The enquiry liable to be
undertaken must pose and answer the question whether in a composite contract
there exists a separate and distinct intent to sell. While BSNL dealing with
the dominant nature test was concerned with the splitting of the element of
sale and service, in the facts of the present case, the application and
invocation of that principle requires the Court to consider whether there was a
separate and distinct intent to effect a sale of the charger or whether its
supply was a mere concomitant to the principal intent of sale of a mobile
phone.

Admittedly,
the mobile phone and charger are sold as part of a composite package. The
primary intent of the contract appears to be the sale of the mobile phone and
the supply of the charger at best collateral or connected to the sale of the
mobile phone. The predominant and paramount intent of the transaction must be
recognised to be the sale of the mobile phone. In the case of transactions of
the commodity in question, the Court must also bear in mind that a charger can
possibly be purchased separately also. However in case it is placed in a single
retail package along with the mobile phone, the primary intent is the purchase
of the mobile phone. The supply of the charger is clearly only incidental. In
any view of the matter, there does not appear to be any separate or distinct
intent to sell the charger.

Regard
must also be had to the fact that the Court is considering the case of a
composite package, which bears a singular MRP. The charger is admittedly
neither classified nor priced separately on the package. It is also not
invoiced separately. The MRP is of the composite package. The respondents
therefore cannot be permitted to split the value of the commodities contained
therein and tax them separately. This especially when one bears in mind that
entry 28 itself correlates the article to the MRP.

The
third aspect which also commends consideration is that the MRP mentioned on the
package is for the commodities or articles contained therein as a whole. It is
not for a particular commodity or individual article contained in the composite
retail package. The Court notes that Shri Tripathi, the learned standing
counsel, was unable to draw its attention to any provision or machinery under
the 2008 Act which may have conferred or clothed the assessing authority with
the jurisdiction to undertake such an exercise. It is pertinent to note that the
only category of composite contracts which stand encapsulated under the 2008
Act are works contract and hire purchase agreements. The other part of Article
366 (29-A) which stands engrafted is with respect to the transfer of a right to
use. The composite contracts which arise from the sale of a composite package
are not dealt with under the 2008 Act. The Act also does not put in place or
engraft any provision which may empower the assessing authority to severe or
bifurcate the assessable value of articles comprising a purchase and sale of
composite packages. This is more so in the absence of a specific, independent
and identifiable element to sell. In the absence of any procedure or provision
in the 2008 Act conferring such authority, the Court concludes that in the case
of a sale of composite packages bearing a singular MRP, the authorities under
the 2008 Act cannot possibly assess the components of such a composite package
separately. Such an exercise, if undertaken, would also fall foul of the
principles enunciated by the Supreme Court in Commissioner of Commercial Tax
vs. Larsen & Toubro14 and CIT vs. BC Srinivasa Shetty15.”

Thus,
after analysing position very minutely, Hon. High Court held that in given
facts there is sale only of mobile phone and not of charger and no separate tax
on charger is permissible. The judgements of Tribunal were set aside.

Conclusion

The
judgement is very important in light of fact that it distinguishes the
judgement of Hon. Supreme Court in Nokia, with reference to facts and
ratio application, relying upon almost all important case laws. This judgement
will also settle down unexpected and unintended result for dealers.

It is
expected that the law laid down will be well followed as amongst others, it is
also held that if there are no provision to bifurcate value, no bifurcation can
be done by revenue authorities.

We
hope above will be a guiding judgement for deciding similar cases.

shailesh.kwebmaker

Construction Contract Vis-À-Vis Repair Contract

Introduction

Under Maharashtra Value Added Tax
Act, 2002 (MVAT Act), the Works Contracts were taxable by different methods.
There was one normal method by way of deduction u/r 58 of MVAT Rules and in
alternative there were certain composition schemes.

Under Composition Schemes there
were two alternatives, like 5% composition scheme for construction contracts
and 8% composition scheme for other contracts.

The 5% composition was applicable
to only notified contracts. The Government has issued notification dated 30.11.2006,
notifying the said ‘construction contracts’. The notification is reproduced
below for ready reference.

“FINANCE DEPARTMENT

Mantralaya, Mumbai 400 032, dated the 30^thNovember
2006

NOTIFICATION – The Maharashtra Value Added Tax Act, 2002.

No. VAT.1506/CR-134/Taxation-1– In
exercise of the powers conferred by clause (i) of the Explanation to
sub-section (3) of section 42 of the Maharashtra Value Added Tax Act, 2002
[Mah. IX of 2005], the Government of Maharashtra hereby notifies the following
works contracts to be the ‘Construction Contracts’ for the purposes of the said
sub-section, namely:-

(A) Contracts for construction of,–

(1) Buildings,

(2) Roads,

(3) Runways,

(4) Bridges, Railway over
bridges,

(5) Dams,

(6) Tunnels,

(7) Canals,

(8) Barrages,

(9) Diversions,

(10) Rail tracks,

(11) Causeways, Subways,
Spillways,

(12) Water supply schemes,

(13) Sewerage works,

(14) Drainage,

(15) Swimming pools,

(16) Water Purification
plants and

(17) Jettys

(B) Any works
contract incidental or ancillary to the contracts mentioned in paragraph (A)
above, if such work contracts are awarded and executed before the completion of
the said contracts.

By order and in the name of the Governor of
Maharashtra.”

Controversy

In relation to the above
notification, there was a controversy about the scope of the notified items.
Particularly, in relation to contracts for construction of building, there was
a dispute as to whether only new construction can be covered or repair of existing
building can also be covered. If the contract was for repair of the existing
building, then the view of the department was that it cannot be covered under
the above notification.

Bombay
High Court Ruling

One of the matters, having such
dispute, went to the Hon. Bombay High Court by way of appeal under MVAT Act.
The matter is in case of Painterior (India) (Maharashtra VAT Appeal No. 22
of 2017 dated 25.7.2017)(Bom).

The Hon. High Court has narrated
the facts as under:

“Background of the Appeal:

3. The Appellant is a
registered partnership firm registered under the MVAT Act. The Appellant is in
the business of repairs/reconstruction of buildings. Application dated 14^thJune 2010, was filed by the Appellant before the Commissioner of Sales
Tax, Maharashtra State (for short, “The Commissioner”) u/s. 56 of the
MVAT Act, for determination of the rate of tax applicable to a contract for
repairs of a building, as the repairs/reconstruction contracts are covered by
the expression “construction contracts”, which is used in section 42(3)
of the MVAT Act read with Notification No.VAT.1506/CR134/Taxation/1 dated 30^th
November 2006. The rate of tax applicable thereto, would be 5% as notified
under the Act. The Appellant had forwarded along with the Application to the
Commissioner such type of contract with the Sangam Bhavan Building.

4. The Appellant also prayed
for the direction that the determination of the Commissioner should not affect
the liability of the Appellant under the Act in respect of any sale affected
prior to the determination. The Commissioner by order dated 25^th
July 2014, rejected the contention of the Appellant and made a determination
that the contract is not a “Construction Contract”, thus attracting the
rate of tax at 8%. Being aggrieved by the order passed by the Commissioner, the
Appellant approached the Maharashtra Sales Tax Tribunal (for short, “the
Tribunal”) in Appeal. The Tribunal by Judgment and order dated 15^thDecember
2016, confirmed the order passed by the Commissioner. Hence, the Appeal.”

The Hon. High Court referred to the
provisions of the Act as well as earlier circulars under Works Contract Tax
Act. Under Works Contract Tax Act, for the amnesty scheme, the Commissioner of
Sales Tax has clarified that repair contracts are also Construction contracts.
Having this interpretation long back, the Hon. High Court held that there is no
reason to change the interpretation. The observations of the Hon. High Court
are as under:

“13. It is necessary to note that
under the WC Act, referring to section 6A(1) a similar notification dated 8
March 2000 was in existence, referring to the contract for construction of
“building”. Similar clause (B) of notification under MVAT Act dated 30^th
November 2006 was in existence under Section 42(3) Explanation. The Trade
circular was in existence about the repair, reconstruction and maintenance to
buildings, dams, bridges, canals and barrages would be covered under the
expression of “Construction Contract”, though it was for the purpose of amnesty
scheme. This undisputed position on record shows the consistent stand and
interpretation even of the Department that the “Construction Contract” includes
the repair and reconstruction and maintenance of building. There is no contra
circular and/or material available placed on record in this regard. The
circulars and the practice so adopted by the Department, since long, ought not
to have been overruled while rejecting the case/claim of the Appellant.

14. Therefore, considering the
scheme and purpose of section 42(3)(i) and notification dated 30^th
November 2006 under the MVAT Act, we are of the view that the ‘Works Contract’
in question, would be the ‘Construction Contract’. The contract for
construction of buildings includes the repairing, reconstruction and maintenance
of building etc. This is also for the reason that there is no
distinguishing feature and definitions and/or intention reflected in any
provisions about the nature of buildings, whether it is new building or old
building. The word “new” or “old” so observed in the impugned order as not
specifically defined or explained anywhere, cannot be added by giving such
restrictive interpretation to the provisions and the notification in question.
The term “Building” cannot be restricted only to the new building specifically
when, as per the practice and the explanation so given in similarly placed
provisions under the WC Act and the notification explaining the term so
referred above. In spite of the earlier provisions and the interpretation so
given, there is no reason to overlook the same specifically when, there is no
further clarification and/or provisions brought on record to supersede and/or
take away the clarification so issued by the Commissioner at the relevant time.
The repairing and/or reconstruction, if part of Construction Contract, which in
normal parlance and/or understanding cannot be read to mean that the
construction contract refers under these provisions only for the new building.
It is unacceptable and there is no rational and/or justification for want of
specific provisions of such interpretation.”

Conclusion

Thus,
the Hon. High Court has decided on this highly disputed issue which will bring
the controversy to end. Further, it also becomes clear that the circular
interpretation remains binding even if it is in a different situation.
Consistency in interpretation is getting impliedly confirmed by the Hon. High
Court. We hope that such a trend will always be kept in mind by the revenue
authorities for simplification of law.

shailesh.kwebmaker

Sales Return – Scope

Introduction

Under VAT laws, tax can be
levied on sale of ‘goods’. Completed
sale is liable to tax. However, there may be a situation where the goods sold
are returned by the buyer. Since the transaction of sale is already complete,
even if subsequently there is sales return (which is also referred to as ‘goods
return’) the liability will still remain on the same. However, the legislature
gave some latitude by giving facility of deduction of sales return from taxable
turnover, if such return is within the stipulated time limit.

There are provisions under
Maharashtra Vat Act (MVAT Act) and Central Sales Tax Act (CST Act) explaining
that if the goods sold are returned back within six months from the date of
sale, then such return should be given deduction and no tax should be payable
on such goods return portion. If the return is beyond the prescribed period of
six months, then the deduction is not allowable and tax is payable on the full
sale value.

Sales
Return – Scope

The issue arises as to when
the goods returned are eligible for deduction as sales return? An important
judgement has come on the same from Hon. Bombay High Court. The judgement is in
case of Reliance Industries Ltd. vs. State of Maharashtra (50 GSTR 1)(Bom).
The facts in this case, as narrated by High Court are as under:

“3. In Writ Petition No. 2217
of 2015, the Petitioner is Reliance Industries Limited (for short
“RIL”) which is a public limited company inter alia engaged in
the manufacture of petrochemicals. Respondent No.1 is the State of Maharashtra,
through its Secretary, Ministry of Finance. Respondent No.2 is the MSTT
constituted under the BST Act. Respondent No.3 is Bharat Petroleum Corporation
Limited (for short “BPCL”) which is a public sector undertaking
engaged in the business of refining and selling petroleum products and who is
the supplier of Kerosene to RIL in the present dispute. Respondent No.4 is the
Commissioner of Sales Tax functioning and discharging his duties under the
provisions of the BST Act.

4. It is the case of RIL that
in or around 1992, RIL had established a petrochemical plant in Patalganga for
manufacturing Linear Alkyl Benzenes (“LAB”). RIL required N-Paraffin
as a raw material for the manufacture of LAB. According to RIL, Kerosene (also
known as Paraffin), is a mixture of Hydrocarbons in the range of C-8 to C-18.
Out of such mixture, the Hydrocarbons C-8 and C-9 are known as Light Paraffin.
Hydrocarbons from C-10 to C-13 are known as N-Paraffin (which is required by
RIL). The range of Hydrocarbons from C-14 to C-18 are known as Heavy Paraffin.
According to RIL, N-Paraffin itself is also Kerosene and is one of the many
constituents of Kerosene.

5. According to RIL,
N-Paraffin is easily obtained from kerosene by using a molecular sieve. This,
according to RIL, is only a physical activity not involving any chemical
reaction. The molecular sieve would absorb the N-Paraffin only and the rest of
the Kerosene would simply pass through the said Sieve. Subsequently, the
N-Paraffin is de-absorbed from the molecular Sieve.

6. According to RIL, BPCL is
having a refinery at Mahul for many years prior to 1992. One of the products
produced by BPCL in the said refinery is Kerosene. Kerosene is as such sold by
BPCL through the Public Distribution System (involving a dealer network) to its
final consumers.

7. Be that as it may, an exclusive
pipeline of approximately 56 kms was laid connecting the Mahul refinery and
Petitioner’s factory at Patalganga so as to ensure continuous and constant to
and fro movement of the requisite quantity of Kerosene from BPCL to RIL and
from RIL to BPCL, respectively. It is in these circumstances that RIL entered
into an agreement dated 24^th August, 1992 with BPCL for procurement
of Superior Kerosene Oil. As this Kerosene was required for manufacturing of
LAB as Feed Stock (FS), it was described as KO (LABFS). A copy of this
agreement can be found at Exhibit “C” to the Writ Petition.

8. According to RIL, it was
agreed between itself and BPCL that Kerosene would be delivered to RIL. In
turn, RIL would consume the suitable quantity of Kerosene by taking out N-
Paraffin required by it and send the balance quantity of Kerosene back to BPCL
as a “return stream”. According to RIL, this agreement mandatorily
required the Petitioner (by way of “return stream”) to return the
quantity of Kerosene after extracting the N-Paraffin. According to RIL, this
agreement thus provided for supply of Kerosene solely for the purposes of
consuming the requisite quantity of kerosene. Thereafter, the balance quantity
of Kerosene was to be returned back to BPCL.

9. According to RIL, the
“return stream” is a common phrase used in the petroleum and
petrochemical industry both within India as also internationally. A petroleum
product would be sent by the refinery to a petrochemical complex. The
petrochemical complex would use/consume the required quantity of item and
return the balance petroleum product to the refinery as a “return
stream”.”

In a nutshell, the issue was
that BPCL has to supply kerosene namely KO (LABFS) to RIL. RIL to extract
n-paraffin from the said kerosene and the balance kerosene will be returned
back to BPCL. The issue was whether such return of kerosene by RIL to BPCL will
be purchase by BPCL from RIL or it will simply be a case of sales return by RIL
to BPCL.

There were a number of issues
involved in the case. There were arguments from the both the sides.

Hon. High Court considered
arguments from both the sides and also referred to the relevant provisions
under MVAT Act like definition of manufacture, resale, turnover of sale etc.
After having such reference, Hon. High Court observed about the merits of the
case as under:

“53. What can be discerned
from the aforesaid definitions and as even correctly submitted by Mr.
Venkatraman as well as Mr. Dada is that for there to be a sales return, the
goods originally supplied and the delivery of the return stream should be one
and the same goods. If the goods that are sought to be returned are a product
which is different from the one that was originally supplied, the same can
never be termed as a sales return.

54. In the facts of the
present case, we are clearly of the view that the product that was supplied by
BPCL to RIL in the first leg of the transaction was different from the return
stream that was supplied/returned by RIL to BPCL. As mentioned earlier, the
Kerosene that was supplied by BPCL to RIL was rich in N-Paraffin. It comprises
of Hydrocarbons C9 to C14. The Kerosene that was sought to be returned by RIL
to BPCL was after the extraction of N-Paraffin. In other words, Hydrocarbons C9
to C14 were specifically denuded from the Kerosene that was returned by RIL to
BPCL. In fact, it is not in dispute that the returned Kerosene is denuded by
more than 50% of N-Paraffin. The Kerosene that was supplied by BPCL also known
as SKO (LABFS) which contains N- Paraffins was viable for commercial extraction
of N-Paraffin whereas the product given by the RIL to BPCL after extracting the
N-Paraffin is not viable for extraction of N-Paraffin due to the fact that the
return stream does not contain the extractable quantity. At least to our mind,
therefore, it is clear that the product supplied by the BPCL to RIL is very
different from the product that is returned by RIL to BPCL. To put it in other
words, the Kerosene supplied by the BPCL to RIL is pre-processed and the
Kerosene returned by RIL to BPCL is a processed product and hence are two
different commercial products. It is true that even the returned Kerosene meets
the BIS standards to be termed and used as Kerosene, but that alone cannot be
the test to come to the conclusion that the product returned by RIL is one and
the same as was supplied by BPCL to RIL in the first leg of the transaction. It
is an admitted fact before us, at least across the bar, that the Kerosene
supplied by BPCL to RIL can be used for extraction of N Paraffins whereas the
Kerosene returned by RIL to BPCL cannot be used for the same purpose. The
process of extraction carried out by RIL is thus a manufacture within the
meaning of the said expression as defined in the BST Act and the kerosene is
therefore not returned to BPCL in the same form. In other words, BPCL cannot
use the Kerosene returned by RIL to be supplied to another Petrochemical plant
for extraction of N-Paraffin. This, to our mind, would clearly go to establish
that the Kerosene supplied by BPCL to RIL in the first leg of the transaction
and the product returned by RIL to BPCL in the second leg of the transaction,
at least for the purposes of sales tax, are two different products. It cannot
be disputed that the two products are different in character and use. This
being the case, it is quite clear that the return stream of Kerosene and which
was sought to be returned by RIL to BPCL can never be termed as a sales return
but in fact a sale by RIL to BPCL.”

Thus, Hon. High Court decided
the yard stick about scope of sales return. If the goods sold and returned are
not the same goods but different goods, then there is no scope for claim of
sales return.

Prospective
effect to the liability

One more issue which is
decided in this matter is about prospective effect to the adverse determination
order. Since the dealer was guided earlier by favorable determination order.
Hon. High Court held that even if it is now reversed, still the protection is
required to be given for past liability. The relevant observations of Hon. High
Court are as under:

“70. What is ex-facie
clear from reading the provisions of Section 52 is that the Commissioner, in
the given facts and circumstances of the case, certainly has the power to
exercise his discretion and give prospective effect to the DDQ order passed by
him u/s. 52(1). As correctly submitted by Mr. Venkatraman as well as Mr. Dada,
in the facts of the present case, since the DDQ order dated 11^th
September, 2006 was passed in favour of the assessee, there was no occasion nor
any reason to request the Commissioner to grant prospective effect to his
order. The question of prospective effect would only arise when the order of
the Commissioner was reversed by the Tribunal vide the impugned order dated 20^th
January, 2015. Further, it is not in dispute before us that it is for the first
time in the history of the Bombay Sales Tax Act that the DDQ order passed by
the Commissioner u/s. 52 (1) was challenged by
the State of Maharashtra before the MSTT. From the facts narrated in this
judgement, it is also clear that bonafide litigation between the parties
has gone on right from the year 1992 till 2015. Further, right from the
assessment years 1988-1989 till 2004-2005, the assessments have been allowed in
favour of the assessee, namely RIL on the basis that the return stream of
Kerosene was a “goods return”. If prospective effect is not given to
the order of the Tribunal it would effectively lead to a situation that all
past assessments would have to be reopened and which would be highly unfair and
prejudicial not only to RIL but also to BPCL.”

Conclusion

The judgement has far reaching
effect in understanding the scope of sales return. It is also a guiding
judgement in respect of use of discretionary power of prospective effect in
determination proceedings. The dealers’ community may have good guidance from
the above judgement.

shailesh.kwebmaker

Reduction in Sale Price Due To Discount Given By Issue of Credit Notes Subsequent To the Invoice

INTRODUCTION
Under Sales Tax Laws, tax is payable on the ‘sale price’ of goods. Sale price is normally defined in respective State Acts. For example, under MVAT Act, term “sale price” is defined in section 2(25) as under.

“2(25) “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged….”

There is a separate mention about discount given from the original sale price.

Discounts are generally given in the invoice itself. There may not be much difficulty in claiming reduction for such discount amount from the sale price.

However, discount can also be given after the invoices are issued. There may be discount schemes like turnover discount, early payment discount, where discount will be eligible on happening of a given event. In such cases, invoices would be at original price. The subsequent discount will be required to be given by issue of credit note.

In some of the States, there are provisions providing that discount mentioned in the invoices will be eligible
for reduction.

The issue that arises is whether such type of provisions requires strict interpretation or can be interpreted liberally so as also to include discounts given by credit note/s issued separately after the issue of invoice/s.

Recent judgment of Hon. Supreme Court in case of Southern Motors vs. State of Karnataka (Civil Appeal Nos.10955-10971 of 2016 dt.18.1.2017)

In this case, the issue before the Hon. Supreme Court was from Karnataka VAT Act, 2003. The facts leading to the litigation, as mentioned in the judgment, can be noted as under:

“3. The foundational facts, albeit not in dispute present the required preface. The appellant is a dealer in the motor vehicles and registered under the Act. Its version is that during the years in question i.e. 2007-2008 and
2008-2009, it raised tax invoices on the purchasers as per the policy of manufacturers of vehicles to maintain uniformity in the price thereof. After the sales were completed, credit notes were issued to the customers granting discounts, in order to meet the competition in the market and for allied reasons.

Consequentially, it received/retained only the net amount that is the amount shown in the invoice less the sum of discount disclosed in the credit note. Accordingly, the net amount, so received was reflected in his books of account and returns were filed …..”

The assessing authority took a view that as per the Karnataka VAT Rules, 2003, only such discount which is mentioned in the invoices is allowable. Since the discount was given post issue of invoices, it was held that it is not deductible from the sale price. Karnataka High Court upheld the claim of State Government. Before Hon. Supreme Court the main argument of the dealer was as under:

“7. The emphatic insistence on behalf of the appellant is that the combined reading of section 30 and Rule 31 demonstrates in clear terms that the assesses are entitled to claim deduction of the discount allowed to their customers by credit notes, from the total turnover to quantify their taxable turnover. The learned counsel have urged that as some discounts, especially those linked to targets to be achieved in a particular period are not comprehend able at the time of sale, these logically cannot be reflected in the tax invoices.

They have maintained that such discounts actualise through credit notes at the end of the prescribed period for which the target is fixed and are thus governed by section 30 of the Act and Rule 31 of the Rules. They have asserted that in no view of the matter, Rule 3(2)(c)can be conceded a primacy to curtail or abrogate Section 30 or Rule 31 of the Rules, lest the latter provisions are rendered otiose. Such an explication would also be extinctive of the concept of the well ingrained concept of turnover/trade discount which is indefensible.”

The department stuck to the stand that rule is to be applied strictly. The arguments of the sales tax department are noted as under:

“9. In refutation, the learned counsel for the respondents, has argued that a discount to qualify for deduction to compute the total and eventual taxable turnover, as contemplated in Rule 3(2)(c) of the Rules has to be essentially reflected in the tax invoice or the bill of sale issued in respect of the sales.

According to them, section 30 and Rule 31 deal with a situation where after a tax invoice is issued, it transpires that the tax charged has either exceeded or has fallen short of the tax payable for which a credit/debit note, as the case may be, would be issued. As these two provisions do not regulate the computation of a taxable turnover, there is no correlation thereof with Rule 3(2)(c) of the Rules which has been assigned an independent role to determine the tax liability. In absence of any specific provision in the parent statute granting tax exemption based on deduction founded on post sale trade discount, section 30 and Rule 31 are of no avail to the assesses, he urged. It is maintained that in any view of the matter, a taxing statute has to be construed strictly and any exemption is permissible only if the legislation permits the same. Reliance in buttress of the above has been placed on the decisions of this Court in A.V. Fernandez vs. The State of Kerala 1957 SCR 837, IFB Industries Ltd. vs. State of Kerala (2012) 4 SCC 618 and Jayam & Co. vs. Assistant Commissioner and Another (2016) 8 SCALE 70.”

The Supreme Court referred to a number of precedents on the issue. Ultimately, the Supreme Court came to conclusion that the sale price means what is actually received by the vendor. Therefore, the Supreme Court observed that rules cannot be interpreted to disallow reduction where actual discount is passed on and the amount is not receivable to the dealer. The pertinent observations of the Supreme Court are as under:

“37. On an overall review of the scheme of the Act and the Rules and the underlying objectives in particular of Sections 29 and 30 of the Act and Rule 3 of the Rules, we are of the considered opinion that the requirement of reference of the discount in the tax invoice or bill of sale to qualify it for deduction has to be construed in relation to the transaction resulting in the final sale/purchase price and not limited to the original sale sans the trade discount. However, the transactions allowing discount have to be proved on the basis of contemporaneous records and the final sale price after deducting the trade discount must mandatorily be reflected in the accounts as stipulated under Rule 3(2)(c) of the Rules. The sale/purchase price has to be adjudged on a combined consideration of the tax invoice or bill of sale as the case may be along with the accounts reflecting the trade discount and the actual price paid.

The first proviso has thus to be so read down, as above, to be in consonance with the true intendment of the legislature and to achieve as well the avowed objective of correct determination of the taxable turnover. The contrary interpretation accorded by the High Court being in defiance of logic and the established axioms of interpretation of statutes is thus unacceptable and is negated.”

CONCLUSION
Thus, the Hon’ble Supreme Court has decided a very important issue. The discounts are part and parcel of business activity. It will not be just to levy tax on an amount, which is neither received nor receivable as per the understanding of the parties. Therefore, the above judgment of the Hon. Supreme Court will be guiding judgment including in the forthcoming GST era.

shailesh.kwebmaker

Sale In The Course Of Import Vis-À-Vis Works Contract

Introduction

Under Sales Tax Laws, sales effected in the course of import
are exempt. The protection is given by Article 286 of the Constitution of
India. The nature of sale in the course of import is defined in section 5(2) of
the CST Act, 1956 which is as under;

“(2) A sale or purchase of goods
shall be deemed to take place in the course of the import of the goods into the
territory of India only if the sale or purchase either occasions such import or
is effected by a transfer of documents of title to the goods before the goods
have crossed the customs frontiers of India.”

It can be seen that there are two limbs in above
section. The first limb covers the sale
which occasions the import. The second
limb covers sales which are effected by transfer of documents of title to goods
before the goods cross Customs Frontiers of India.

In relation to first limb, there are a number of precedents.
There are cases, where importer has committed sale of goods to be imported, to
its buyer and the actual import is made after such commitment. The first sale
by foreign seller to importer is occasioning the import and hence covered by
first limb. However, it is also possible that the sale made by importer to the
local buyer after import can be covered by the said first limb. However, the
issue is debatable and depends upon facts of each case.

After the 46^th amendment to the Constitution, the
works contract sales are also brought in taxable net under sales tax laws.
Issue arises as to whether the theory of sale in the course of import, more
particularly sale to local buyer, after import, can be covered within first
limb of section 5(2) of the CST Act.

Inextricable link

For claiming sale to local buyer after import, as covered by
first limb as sale in the course of import, it is necessary that there is
inextricable link between import and local sale. In other words, it is required
to be seen whether the import and local sale after import are interlinked.
There are number of criteria to decide inextricable link.

Judgment of Supreme Court

Recently, the Hon’ble Supreme Court had an occasion to decide
such an issue. The judgment is in case of Commissioner, Delhi Value Added
Tax vs. ABB Ltd. (91 VST 188). The short facts of the case noted by the
Hon’ble Supreme Court are as under;

“3. Before adverting to the main issue as to whether the High
Court judgment is correct in law as well as in facts or not, it would be
appropriate to notice some of the relevant facts. The respondent is a Public
Limited Company engaged, inter alia, in manufacture and sale of
engineering goods including power distribution system and SCADA system. It
appears to be a market leader in power and automation technologies. It is a
subsidiary of ABB Ltd., Zurich Switzerland which has operational presence in
over 100 countries and employs around 1,30,000 personnel. On 15.05.2003 DMRC
invited tenders for supply, installation, testing and commissioning of traction
electrification, power supply, power distribution and SCADA system for Line 3
Barakhamba Road-Connaught Place-Dwarka Section of the DMRC. Respondent
responded.

4. DMRC short listed the respondent and then executed
the contract under which the respondent had to provide transformers,
switch-gears, High Voltage Cables, SCADA system and also complete electrical solution,
including control room for operation of metro trains on the concerned Section.
The Bid Document contained detailed bill of goods, quantities and
specifications for the goods, sources (i.e, name of the manufacturer/brand),
detailed terms and conditions requiring approval of sub-contractors/ suppliers
and testing. The goods as also the components of works required certification
as well as acceptance. The NIT required both, Technical Bid and Financial Bid.
Besides the quotation of lumpsum price for the entire scope of work the Bid
Document required individual breakup of price of goods and other details. Bid
submitted by the respondent finally culminated into a contract on 04.08.2004.
The contract document comprised of Special Conditions of Contract, General
Conditions of Contract etc.”

The Delhi sales tax authorities held that there was no link
between the import and contract between DMRC (contractee) and supplier of goods
i.e. ABB Ltd (importer). In other words the claim of sale, in the course
import, by ABB Ltd to DMRC under works contract was disallowed.

Hon’ble Delhi High Court, after going through the contract
allowed the transaction as sale in the course of import and accordingly held it
exempt. Before the Supreme Court, similar arguments were repeated. In
particular, sales tax department relied upon judgment in case of M/s Binani
Brothers Pvt Ltd (1974)1 SC 459. The Hon’ble High Court has allowed the
claim based on judgment in case of K. G. Khosla & Co AIR 1966 SC 1216.
The Hon’ble Supreme Court dealt with this argument elaborately with
reference to above judgments. The observation of the Hon’ble Supreme Court are
as under :-

“12. For analysing the main contention advanced on
behalf of the appellant that the present case is identical to that of the
assessee in the case of Binani Bros. (supra), we have examined
the facts of Binani Bros. (supra) with meticulous care. In para
13 of that judgment the most peculiar and conspicuous aspect of K.G. Khosla
case (supra) was noticed and highlighted that “under the contract of
sale the goods were liable to be rejected after a further inspection by the
buyer in India.” In the same paragraph it was further highlighted with the help
of a quotation from K.G. Khosla case (supra) that movement of
goods imported to India was in pursuance of the conditions of the contract
between the assessee and the Director General of Supplies. There was no
possibility of such goods being used by the assessee for any other purpose. In
the next paragraph of the Report the peculiar facts of Binani Bros. (supra)
were highlighted in the following words, “….. the sale by the petitioner to the
DGS&D did not occasion the import. It was purchase made by the petitioner
from the foreign sellers which occasioned the import of the goods”. In paragraph
16 it was further pointed out that there was no obligation on the DGS&D to
procure import licences for the petitioner.

13. There is no difficulty in holding that Binani
Bros. (supra) did not differ with the earlier judgment of a
Constitution Bench in the case of K.G. Khosla (supra). A careful
analysis of the facts in Binani Bros. (supra) leads to a
conclusion that the case of West Bengal Sales Tax authorities in that matter
that there were two sales involved in the transactions in question, one by the
foreign seller to the assessee and the second by the assessee to the DGS&D,
because there was no privity of contract between the DGS&D and the foreign
sellers, was accepted mainly because the assessee was found entitled to supply
the goods to any person, even other than DGS&D because there was no
specification of the goods in such a way as to render it useable only by the
DGS&D. This was coupled with the fact that the latter had imposed no
obligation on the assessee to supply the goods only to itself. Further, there
were no obligations of testing and approving the goods during the course of
manufacture or for that matter, even at a later stage with a right of
rejection. Such a right of rejecting the specific goods in the present case is
identical to the similar right in respect of goods in K.G. Khosla case (supra).
Hence we are unable to accept the main contention of the appellant that this
case is similar to that of Binani Bros (supra). To the contrary, we
agree with the reasonings of the High Court for coming to the view that the
present case is fit to be governed by the ratio laid down in K.G. Khosla’s
case (supra).

14. The legal principles enunciated in K.G. Khosla (supra)
have been reiterated in State of Maharashtra vs. Embee Corporation, Bombay
and stand supported by the judgment in the case of Deputy Commissioner of
Agricultural Income Tax and Sales Tax, Ernakulam vs. Indian Explosives Ltd.,
as well as in Indure Ltd. and Anr. vs. CTO & Ors. In these cases,
sale in course of imports was accepted without requiring privity of contract
between the foreign supplier and the ultimate consumer in India.”

Conclusion

Thus, the Hon’ble Supreme Court allowed the
claim. From the above judgment it becomes clear that the transactions falling
under ‘works contract’ are also eligible for exempted sale as Sale in the
course of import. The judgment will be useful for future guidance on the issue.

shailesh.kwebmaker

Works Contract Vis-À-Vis Consumables

Introduction

Under VAT era (period prior to 30.6.2017) one of the burning
issues is whether the transaction is a ‘works contract’ or ‘service contract’.
If it is works contract then it can be liable to VAT/CST, otherwise not.

There are boundary line cases where nature of transaction is
known on final decision of higher courts like the High Court.

One such transaction is a contract requiring use of
consumables. There are conflicting judgments on this issue. A brief reference
to such judgments can be tracked as under.

Pest Control India Ltd. (75 STC 188)(Pat)

“There can be no transfer of property in goods unless the
goods themselves exist. In the execution of a contract for eradication of
pests, rodents, termites, although chemicals are used, the chemicals are
sprayed through machines so that when the process ends, the chemicals are
consumed and nothing tangible remains in which property is transferred. Such a
transaction does not involve transfer of any goods as understood in sub-clause
(b) of clause (29-A) of article 366 of the Constitution, or under the
provisions of the Bihar Finance Act, 1981. Such a contract is a pure service
contract, and no sales tax is leviable in relation thereto under the provisions
of the Bihar Finance Act, 1981.”

Enviro Chemicals vs. State of Kerala (39 VST 434)(Ker)

“The petitioner had developed a chemical product by name
“envirofloc” used as a chemical for effluent treatment. The
petitioner carried out pollution control treatment for M, a company engaged in
manufacture of yarn. In the course of effluent treatment entrusted to the
petitioner, the petitioner applied the chemical “envirofloc” and it treated
effluent water probably by neutralising colour, odour, etc.. The
petitioner claimed that no transfer or sale took place in the execution of
works contract. The Department took the view that the material was consumed in
the process of effluent treatment and it got transferred in the course of such
treatment and there was sale of goods involved in the execution of works
contract. The petitioner was therefore assessed to tax under the Kerala General
Sales Tax Act, 1963 on the sale of materials involved in the execution of works
contract of effluent treatment at the premises of M, a manufacturer of yarn:

Held, per majority, that admittedly the chemical in question
was goods and the petitioner was the owner of the goods in question, namely,
the chemical. The intention of the parties was that the petitioner must use the
chemical in the effluent treatment process and the petitioner actually used it.
By using the chemical, the petitioner rendered the effluent compliant with the
standards. The moment the petitioner poured the chemicals into the effluent, it
ceased to be the owner and at that point of time M must be deemed to have taken
delivery thereof. The fact that upon its being poured into the effluent, it
lost its identity and that it was consumed would not detract from the fact that
there was delivery thereof to M. The effluent and the treated effluent both
belonged to M. It was, therefore, into the property of M, namely the effluent,
that the petitioner supplied the chemical. The property in the chemicals passed
to M the moment they were put into the effluent by the petitioner and their
subsequent consumption was consumption after sale and did not detract from the
factum of sale and consequently exigibility to tax. There was a sale of
chemical involved in the execution of the works contract as there was delivery
of it to the awarder by virtue of the chemical being poured into the effluent.”

It can be seen that there is apparent conflict between views
of the authorities.

In case of Enviro Chemicals vs. State of Kerala (39 VST 434)(Ker),
the Larger Bench of Kerala High Court has taken an extreme view that once goods
are used for customer there is transfer of property, though customer may not be
getting any tangible property.

Recent judgment in case of VPSSR Facilities vs.
Commissioner of Value Added Tax and ans (99 VST 1)(Del).

This judgment is latest in series. The brief facts as stated
by the Hon. Delhi High Court are as under:

“The petitioner is engaged in the business of providing
services of maintenance, cleaning, washing, housekeeping, waste management, etc.

The petitioner was awarded a contract by the Northern
Railways (hereinafter referred to as the contractee) in relation to the
management, cleaning, washing, housekeeping, waste management, etc., at
Diesel Shed Shakurbasti and at Training School Shakurbasti.

It is contended by the
petitioner that the contract was for cleaning of sites of Northern Railways
(contractee) and was a pure service contract and no transfer of property from
the petitioner (contractor) to Northern Railways (contractee) was involved. It
is contended that the activities undertaken by the petitioner did not
constitute a sale within the meaning of Delhi Value Added Tax Act, 2004
(hereinafter referred to as “the DVAT Act”).

It is contended that being a service contract, the petitioner
is paying service tax at 12.36 % on the entire consideration received by it
from the contractee. There is no separate payment made for the use of
consumables. It is contended that as the payment made by the contractee to the
petitioner was not because of transfer of property in goods, no tax was
required to be deducted at source u/s. 36A of the DVAT Act. It is contended
that the contractee (railways) to be on safe side insisted on deduction of tax
at source.

It is contended that for the purposes of providing the
service of cleaning, the petitioner was required to use soap/detergent/chemical
of a very minimal quantity and a very nominal value. The
soap/detergent/chemical was used for removing the muck/grime and the same got
completely “consumed” in the process and were not transferred to the
railways. It is contended that the contract involved pure labour and service
and was a mere works contract.”

There were arguments on both sides. Judgment of the Hon.
Kerala High Court in Enviro Chemicals is also considered.

To further consider facts, the High Court referred to para in
agreement, which reads as under:

“For the execution of the above work of maintenance, cleaning
washing of locomotives, etc., the petitioner is required to use
chemicals/solvents.

Clause 38 of the special conditions of contract reads as
under:

“38. Chemical/solvents and machines chemical/solvents
used should be eco-friendly, bio degradable pH value 7-8. Chemical/solvent can
be tested by railway from the independent lab at the contractor’s cost.
Chemical/solvents used should be of reputed brand. Contractor after having gone
through the scope of work will calculate the requirement of chemical/solvent
required per month/year. Chemical will be supplied by the contractor and shall
be kept in the custody of railway. These chemicals will be issued to the
contractor on daily basis as per requirement submitted by the contractor and
empty bottles/cans are required to submit back to issuing authority after
completion of daily work. Railway will not pay any amount separately to
contractor for purchase of chemical or machine. Cost of chemicals and machines
should be inclusive in activities mentioned in the schedule of unit
rates.”

Referring to the above clause 38, the respondent/Revenue has
held that the property in the chemicals/solvents used by the petitioner in the
execution of the work has transferred to the contractee.”

Distinguishing judgments including Enviro Chemicals, the
Delhi High Court observed as under:

“In both Enviro Chemicals [2011] 39 VST 434 (Ker) [FB]
and Xerox Modicorp Ltd. [2005] 142 STC 209 (SC); [2005] 7 SCC 380, the
courts were not dealing with the goods which were integral to the service
contract and which were completely consumed during the execution of the service
contract. The goods were consumed for the purposes of the final output, i.e.,
chemical treatment of effluent water (Enviro Chemicals) and spare parts and
Toners and Developers (Xerox Modicorp Ltd.). The courts were not concerned with
goods (soaps/detergent/chemical/solvent) as in the present case, which are
consumed in the process of cleaning. In the present case the contract, inter
alia, requires the petitioner to perform the task of mechanised scrubbing
of shed floor to keep it free from muck/grime arising due to dropping of
oil/grease/effluents and industrial.

Here italicized waste by using biodegradable floor
chemicals/solvent. Mechanised scrubbing by floor scrubbing/scarifying machine,
removal of industrial waste along with muck, unwanted/useless and dumping the
same at the nominated place within the shed complex. Cleaning of floor of main
shed, SMM store, lab and administrative block to keep it free from dropping of
oil/ grease/grime/effluent including removal of cobwebs from covered area.
Cleaning of DEMU Care Centre, DEMU Block and Diesel Training Centre SSB to keep
it free from dropping of oil/grease/grime/effluent including removal of cobwebs
from covered area. Cleaning of rooms, veranda, etc., of lab,
administrative block and offices of Sr. Subordinate Supervisors with wiping by
wet and dry moppers. Cleaning of rooms, veranda, etc., of DEMU Block and
Diesel Training Centre SSB with wiping by wet and dry moppers. To keep floor,
side walls of inspection pits free from muck/grime/ arises due to dropping of
oil/grease/effluents and industrial waste by using high-pressure cold/hot jet
cleaner. Removal of unwanted industrial waste and dumping the same at the
nominated place within the shed complex. To keep floor, side walls of DEMU Care
Centre pits free from muck/grime/ arises due to dropping of
oil/grease/effluents and industrial waste by using high-pressure cold/hot jet
cleaner. Cleaning of toilets by high-pressure water jet cleaner, removal of silt
and muck from urinals. Loco washing/ cleaning of pit wheel lathe machine
complex to keep it free from dropping of oil/grease/grime/effluent/waste metal
chips including removal of cob-webs from covered area.

The soaps, detergent, chemicals and solvent used purely for
the purposes of cleaning and which are completely consumed, in the process of
the execution of the above referred tasks, cannot by any stretch of imagination
be said to be goods in which property could pass to the contractee. Similarly,
water is also used in the above referred process of cleaning and execution of
the contract. Can it be said, that even property in water, that is used and
consumed in the said process of cleaning and execution of the contract, is also
transferred to the contractee and the value of the water consumed should be
exigible to tax?

The mere fact that soaps, detergent, chemicals and solvents
are deposited in the store of the contractee would not make any difference to
the exigibility, as is sought to be contended by the Revenue/respondents,
because, admittedly, by mere deposit in the store, the property in them is not
stated to pass. It is contended by the Revenue/respondent, that the property
passes when they are actually used. The petitioners and the railways have contended
that the said soaps/detergent/chemical/solvent are deposited with the railways
and issued from their store to ensure that adequate quantity is used by the
petitioner for the execution of the awarded work.

In view of the above, we hold that, the property in the
consumable chemicals used in the process of cleaning does not transfer to the
contractee/railways and accordingly the said goods are not exigible to tax.
Since the said goods are not exigible to tax, the contractee/railways is not
liable to deduct tax at source and the Commissioner, VAT is liable to grant a
certificate for Nil deduction of tax deducted at source.”

Thus the transaction is held as not a works contract on
ground that there is no transfer of property.

Conclusion

The margin in works contract and service transaction is very
thin. It is again the perspective of the authorities which will decide the
nature of transaction.

It is expected that similar issue will not arise
under GST.

shailesh.kwebmaker

Works Contract Vis-À-Vis Nature of Goods Sold In Works Contract

Introduction

Taxation of Works Contract
is a debatable issue from beginning. In fact the theory of works contract came
into existence because of complicated nature of the transaction. In case of
works contract, there is more than one element involved like goods, services,
labour and there may be other elements like land etc. Works Contracts
are composite transactions involving supply of goods as well as services.

Taxation of Works Contract

After judgment of the Hon.
Supreme Court in case of Gannon Dunkerly and Co. (9 STC 353)(SC), the
transaction of works contract remained outside the purview of sales tax. In the
above case, it was held that only “Sale” as understood under Sale of Goods Act
is covered under Sales Tax net and transactions of works contract etc. cannot be
covered. It is in 1983, that the 46^th Amendment was effected to the
Constitution, whereby clause (29A) was inserted in Article 366 of the
Constitution so as to include ‘deemed sale transactions’ in the taxation net of
sales tax. There are in all six transactions included in the Constitution. One
of them is works contract transaction. Thus, works contract transaction became
taxable transaction under sales tax as ‘deemed sale’.

Value of goods under Works
Contract

After the above amendment,
issue arose about taxable quantum of the works contract under Sales Tax. The
landmark judgment in case of Builders Association of India (73 STC 370)(SC)
gave the guidelines about taxation of works contract under sales tax. Hon.
Supreme Court held that under Works Contract the sales tax can be levied on the
value of the goods and not on the total value of contract including labour
charges. The relevant portion can be reproduced as under:

“Even after the decision
of this Court in the State of Madras vs. Gannon Dunkerley & Co. (Madras)
Ltd. [1958] 9 STC 353; [1959] SCR 379, it was quite possible that where a
contract entered into in connection with the construction of a building
consisted of two parts, namely, one part relating to the sale of materials used
in the construction of the building by the contractor to the person who had
assigned the contract and another part dealing with the supply of labour and
services, sales tax was leviable on the goods which were agreed to be sold
under the first part. But sales tax could not be levied when the contract in
question was a single and indivisible works contract. After the 46^th
Amendment, the works contract which was an indivisible one is by a legal
fiction altered into a contract which is divisible into one for sale of goods
and the other for supply of labour and services. After the 46^th
Amendment, it has become possible for the States to levy sales tax on the value
of goods involved in a works contract in the same way in which the sales tax
was leviable on the price of the goods and materials supplied in a building
contract which had been entered into in two distinct and separate parts as
stated above.”

Thus, after 46^th
Amendment, the State Government can levy sales tax on the value of the goods
involved in the execution of works contract. It is also clear that the levy
will be similar to tax levied on normal sale of goods.

Rate of tax

Under Sales Tax Laws, one
more important issue is about rate of tax to be applied to value of goods so as
to arrive at tax payable. In other words, after finding value of goods, it is
also equally important to find out the rate of tax applicable to goods involved
in the execution of works contract. This is again a vexed issue. Different
types of goods may be involved in a works contract. One view can be that there
is passing of property in all goods as one category of goods, attracting one
rate. The other view is that different goods are getting transferred and the
rate applicable to such goods respectively should be applied. So there can be
separate rates applicable to respective values of the goods.

Smt.
B. Narasamma vs. Deputy Commissioner Commercial Taxes Karnataka and another (96
VST 357)(SC)

This is the latest
judgment wherein the issue about rate of tax in works contract is dealt with by
Hon. Supreme Court. The issue arose out of Karnataka Sales Tax Law. The brief
facts of the case narrated in the Supreme Court judgment are reproduced below.

“This group of appeals
concerns the rate of taxability of declared goods- i.e., goods declared to be
of special importance u/s. 14 of the Central Sales Tax Act, 1956. The question
that has to be answered in these appeals is whether iron and steel reinforcements
of cement concrete that are used in buildings lose their character as iron and
steel at the point of taxability, that is, at the point of accretion in a works
contract. All these appeals come from the State of Karnataka and can be divided
into two groups—one group relatable to the provisions of the Karnataka Sales
Tax Act, 1957 and post April 1, 2005, appeals that are relatable to the
Karnataka Value Added Tax Act, 2003. The facts in these appeals are more or
less similar. Iron and steel products are used in the execution of works
contracts for reinforcement of cement, the iron and steel products becoming
part of pillars, beams, roofs, etc., which are all parts of the ultimate
immovable structure that is the building or other structure to be constructed.”

Thus, the controversy was
about rate of tax applicable on iron and steel products used in reinforcement
of cement in construction. The argument of State was that the items once used
lose their individual existence and they are chargeable at one rate as
residuary rate. However, Supreme Court has appreciated the contention of the
dealers. The factual position of the use of goods is also narrated by Supreme
Court in this judgment as under:

“Different types of
steel bars/rods of different diameters are used as reinforcement (like TMT
bars, CTD bars, etc.). The reinforcement bars/rods need to be bent at
the ends in a particular fashion to with- stand the bending moments and
flexural shear. The main reinforcement bars/rods have to be placed parallel
along the direction of the longer span. The diameters of such main
reinforcement rods/bars and the distance between any two main reinforcement
bars/rods is calculated depending on the required loads to be carried by the
reinforced cement concrete structure to be built based on various engineering
parameters. At right angles to the main reinforcement bars/rods, distribution
bars/rods of appropriate lesser diameters are placed and the intersections
between the distribution bars/rods and main reinforcement bars/rods are tied
together with binding wire. The tying is not for the purposes of fabrication
but is to see that the iron bars or rods are not displaced during the course of
concreting from the assigned positions as per the drawings. Welding of
longitudinal main bars and transverse distribution bars is not done. In fact,
welding is contra-indicated because it imparts too much rigidity to the
reinforcement which hampers the capacity of the roof structure to oscillate or
bend to compensate varying loads on the structure besides welding reduces the
cross section of the bars/rods weakening their tensile strength. The
reinforcements are placed and tied together in appropriate locations in
accordance with the detailed principles and drawings found in standard bar bending
schedules which lay down the exact parameters of interspaces between bars/rods,
the required diameters of the steel reinforcement bars/rods and contain the
required engineering drawings for placement of bars in a particular manner. The
placement of reinforcement bars/rods for different structures is done under the
supervision of qualified bar tenders and site engineers who are well versed
with the engineering aspects related to steel reinforcement for creating
reinforced cement concrete of desired load bearing capacities.“

After noting the above,
the Hon. Supreme Court held that the steel products were used as it is and they
were not different goods at the time of incorporation. Therefore, the rate
applicable to the goods purchased would apply. The relevant observations are as
under:

“Given the fact-situation
in these appeals, it is obvious that paragraph 101 of this judgment squarely
covers the case against the State, where, commercial goods without change of
their identity as such goods, are merely subject to some processing or
finishing, or are merely joined together, and therefore remain commercially the
same goods which cannot be taxed again, given the rigor of section 15 of the
Central Sales Tax Act. We fail to see how the aforesaid judgment can further
carry the case of the Revenue.”

Thus, the Hon. Supreme
Court laid down that the rate applicable to the goods transferred was
applicable. Further, if the goods transferred are same goods as purchased or
processed goods but the process was not amounting to manufacture, then also the
rate will be same as applicable to goods purchased. Thus, deciding nature of
goods, getting transferred in the contract, is important to decide the rate of tax.

Conclusion

The above judgment will be
useful to resolve the issue about rate of tax. It will be a guiding judgment on
the given issue.

shailesh.kwebmaker

Declared Goods Vis-à-Vis Steel Structural

Introduction

Classification of goods under particular entry of Fiscal Laws
like VAT is always a debatable issue. Till date there are several judgments
determining classification and also laying down principles of classification.

“Declared good” is given special importance under the Central
Sales Tax Act (CST Act) and State VAT laws. One of the conditions about
taxation of declared goods, under VAT laws, is that the rate should not exceed
prescribed limit i.e., 5% at present.

If goods go out of the category of declared goods, they could
be taxable at a higher rate.

Iron and Steel

Iron and Steel is one of the items of declared goods. Under
Maharashtra VAT Act (MVAT Act) the entry reads as under:

Entry C-55 under MVAT Act

Entry

Name of Commodity

Rate
of tax

Date of effect

Iron and steel, that is to
say,

(i) pig iron, sponge iron
and cast iron including ingots, moulds, bottom plates, iron scrap, cast iron
scrap, runner scrap and iron skull scrap;

(ii) steel semis (ingots,
slabs, blooms and billets of all qualities, shapes and sizes);

(iii) skelp bars, tin bars,
sheet bars, hoe bars and sleeper bars;

(iv) steel bars (rounds,
rods, square flats, octagons and hexagons, plain and ribbed or twisted in
coil form as well as straight lengths).;

(v) steel structurals,
(angles, joints, channels, tees, sheet pilling sections, Z sections or any
other rolled sections);

1.5.2011 to date

The scope of above entry is being decided from time to time.

“Steel Structurals”

This item is covered at sub-entry (v) above. There was debate
about scope of above mentioned sub-entry.

As per Revenue the scope of ‘steel structural’ is limited up
to items mentioned in bracketed portion. However, as per assessee, steel
structural is a separate item and cannot be controlled by bracket.

The above controversy was resolved recently by Hon. Bombay
High Court in case of Zamil Steel Buildings India Pvt. Ltd. vs. The State of
Maharashtra (MVXA Tax Appeal No.1 of 2016 dated 23.12.2016).

Facts

The facts as narrated in the judgment are as under:

“(b) The Appellant is inter alia a manufacturer of various
structural steel components such as rigid frame columns, rafters, sheets,
angles, etc. in their factory in Pune. The Appellant has been engaged in
the supply of the said structural steel components since 2007. The Appellant
has regularly been filing returns and discharging its liability under the MVAT
Act.

(c) According to the Appellant, these structural steel
components are fabricated/manufactured based on customers’ as well as
geographical requirements etc.

According to the Appellant, these individual components are
then sold to the customers. The customers may subsequently optionally choose to
avail the service of installation and erection by a sister concern of the
Appellant or by a third party. Thus, according to the Appellant, the so-called pre-engineered
buildings only emerge at the site of the customer after erection and after the
completed sale of different components by the Appellant.

(d) Until the year 2011, the Appellant had been collecting
VAT from its customers at the rate of 12.5% on account of RFCs (Rigid Frame
Columns) and Rafters and remitting the same to the revenue. Thereafter,
sometime in 2011, pursuant to a legal opinion obtained by the Appellant, the
Appellant started collecting tax at the rate of 5% and not 12.5% specifically on
rafters and RFCs and started remitting the same to the revenue.

The opinion obtained by the Appellant was based, inter alia,
on a judgment of the Rajasthan High Court in the case of Prateek Technocom
vs. State of Rajasthan [(2006) 6 VAT Reporter 9 (Rajasthan)].
Simultaneously, the Appellant invoked the procedure for determination of
disputed questions (DDQ) under the provisions of the MVAT Act for one of the
products supplied by it i.e. RFCs. The invoice number referred to in the said
DDQ Application (i.e. ZSB-0023/2010-2011 dated 6th April, 2010) describes the
goods sold as “Supply of Pre-Fabricated Building Components (AS PER PACKING
SLIP)”. In turn, the said packing slip describes the commodities sold as “Rigid
Frame Columns and Interior Columns”. Accordingly, under the said DDQ
Application, the Appellant applied to Respondent No.2 to determine as to
whether the RFCs supplied to its customers would fall under Schedule Entry
C-55(v) of the MVAT Act. We must mention here that Schedule Entry C-55(v) attracts
sales tax at the rate of 5%.”

The assessee submitted that the steel structural, (RFC)
though made by welding and not structural as covered by items mentioned in
bracket, is still covered by plain language as given in sub-entry. It was
submitted that the rule of “ejusdem generis” cannot apply on reverse
basis, i.e. prior words cannot be controlled by subsequent words though
subsequent words can be controlled by prior words. It was submitted that the
bracketed items are by way of illustration. Supporting judgments were cited.

On behalf of Revenue, the main plank of argument was that
only items mentioned in bracket will be covered. It was also argued that Iron
and Steel entry intends to cover iron and steel in raw form and not made ups
from iron and steel. Therefore, it was argued that the steel structural in
present case, which is made ups by welding etc., cannot be covered.

The Hon. High Court concurred with the assessee, after giving
elaborate reasoning.

The Hon. High Court held as under:

“27. Looking to these authoritative pronouncements, it is
clear that the utility of a bracket is only as an illustration, explanation or
extra information. It is thus clarificatory. It is not always exhaustive of the
terms outside the bracket. It cannot curtail or limit the scope of the terms
employed outside the bracket. Eventually, no general rule can be laid down. As
held by the Supreme Court, ordinarily, words appearing in brackets are
illustrative and not exhaustive. Therefore, everything would depend upon the
context and purpose with which in an individual statute the words in the
bracket are inserted by the Competent Legislature. Applying these principles,
we are unable to agree with Mr. Sonpal that though the goods of the Appellant
may be “steel structurals”, but if they do not fall within the
description of the terms as set out in the brackets viz. “(angles, joints,
channels, tees, sheet piling sections, Z sections or any other rolled sections)”,
then they would not be covered either u/s. 14(iv)(v) of CST Act or Schedule
Entry C-55(v) of the MVAT Act. We are unable to agree with Mr. Sonpal that
enumeration of the six items in the bracketed portion are with a specific
purpose of restricting the meaning of the words “steel structurals” preceding
and outside the brackets. In fact, we find that the six items appearing in the
bracketed portion of section 14(iv)(v) of the CST Act and Schedule Entry
C-55(v) of the MVAT Act are clearly not exhaustive, but descriptive of the
words “steel structurals”.”

The High Court further observed as under:

“29. Equally, we are also unable to agree with the argument
of Mr. Sonpal as well as the finding of the MSTT that because the goods sold by
the Appellant are brought into being by a process of welding and not rolling,
the same cannot be classified under Schedule Entry C-55(v) of the MVAT Act. We
find this argument totally without any merit. As mentioned earlier, the items
mentioned in section 14(iv)(v) of the CST Act read with Schedule Entry C-55(v)
of the MVAT Act are goods of special importance in inter-state trade or
commerce. It would be ludicrous to suggest that “steel structurals” that
are manufactured from rolled sections are goods of special importance, whereas
“steel structurals” that are brought into being by a welding process are
not goods of special importance. We see nothing in the Statute to make this
distinction. Even otherwise, we find that the authorities below erred in
concluding that even the specific terms namely “angles, joints, channels,
tees, sheet piling sections, Z sections” should all be “rolled sections”.
As mentioned earlier, section 14(iv)(v) of the CST Act and Schedule Entry
C-55(v) of the MVAT Act deals with “steel structurals (angles, joints,
channels, tees, sheet piling sections, Z sections or any other rolled sections)”.
According to the authorities below, the words “or any other rolled sections”
would apply to all the other items including “steel structurals”. In
other words, according to the Revenue, only rolled steel structurals such as
rolled angles, rolled joists, rolled channels, rolled tees, rolled sheet piling
sections, rolled Z sections or any other rolled sections are covered u/s.
14(iv)(v) of the CST Act and Schedule Entry C-55(v) of the MVAT Act and nothing
else. To put it differently, only goods manufactured by the process of rolling
would be covered under the said provisions. We are unable to agree with this
interpretation for the simple reason that the authorities below have applied
the rule of ‘ejusdem generis’ in reverse. This, and as rightly submitted
by Mr. Sridharan, is impermissible.”

With the above observations the Hon. Bombay High Court
classified the given item, RFC, as steel structural duly covered by entry
C-55(v) as declared goods.

Conclusion

The above judgment not only decides the
controversy but throws light upon various shades of principles of
classification. It will also go a long way to decide scope of entry relating to
Iron and Steel, The wrong impression created so far that the entry for ‘Iron
and Steel’ covers only Iron and steel as raw material has also been clarified. It can include made ups also based on words of the Entry.

shailesh.kwebmaker

Entry Tax on Goods Vis-à-Vis Import of Goods

Introduction

One of the fiscal statutes operative in Maharashtra is
Maharashtra Tax on the Entry of the Goods into Local Areas Act, 2002. The Act
contemplates a levy of Entry Tax when the goods come into Maharashtra from
outside Maharashtra. The tax is leviable only on the goods which are specified
in the Schedule.

One of the items covered by the schedule is low sulphur fuel
oil. The assessee M/s.Tata Power Company Limited imported above item
from foreign country and used the same in its electricity manufacturing activity.
The department levied Entry tax on the same.

While the assessee had many contentions, the main argument of
the assessee was that Entry Tax cannot apply to goods imported from outside
India. Its contention was that the tax can apply only if the goods are imported
from outside Maharashtra but from any place within India.

The Tribunal confirmed the levy. Therefore, the matter was
taken to the Hon. Bombay High Court. The Hon. Bombay High Court has decided the
issue vide judgment reported in Tata Power Company Ltd. and
another vs. State of Maharashtra and ors. 95 VST 147 (Bom).

The relevant statutory provisions as referred to in the
judgment are reproduced below for quick reference:

“2. Definitions:- (1) In this Act, unless the context
otherwise requires,–

(a) …..

(b) “entry of goods”, with all its grammatical
variations and cognate expressions means entry of goods into a local area from
any place outside the State, for consumption, use or sale therein;

(c) “General Sales Tax Act” means any Sales Tax Law
in force in any State which provides for the levy of taxes on the sale or
purchase of goods generally or on any specified goods expressly mentioned in
that behalf or any class of transactions expressly specified in that behalf;

(d) …..

(e) …..

(f) “import”, with all its grammatical variations
and cognate expressions means bringing or causing to be brought or receiving
any goods into a local area from a place outside the State;”

“3. Levy of tax:– (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:”

Important observations about arguments of the Petitioner
as noted by Hon. High Court are as under:

“30. In the additional written submissions, it is urged that
a tax on entry of goods into a local area is patently in violation of Article
301 and no further burden is required to be discharged by the petitioners. When
a tax falls within the inhibition of Article 301 and is not compensatory or
regulatory, then it can be saved only by taking recourse to Article 304. The
requirement thereof is not admittedly satisfied. Further, the impugned levy is
discriminatory. The Act cannot be saved by reading the impugned provisions
thereof together with the MVAT Act. That would not enable this Court to hold
that the same is Constitutional. Additionally it is submitted that if a levy is
held to be non-discriminatory and thus meets Article 304(a), still it must
satisfy the requirements of Article 304(b) as well. For all these reasons, it
is submitted that the impugned levy must be declared as unconstitutional and
ultra vires the above noted provisions or Articles of the Constitution of
India.

31. In support of his contentions, Mr. Dada has placed
reliance on a number of judgments and which can be taken in the order of his
submissions as follows:

1) Father William Fernandez vs. State of Kerala. 115 STC
591(Ker)

2) Primus Imaging Pvt. Ltd. vs. State of Assam. 9 VST 528
(Gauhati)

3) Batliboi & Co. vs. State of Maharashtra. 47 STC 321
(Bom).”

Similarly about arguments of State Government, the Hon. High
Court observed as under:

“36. Mr. Sonpal then relied upon the language of the
Maharashtra Entry Tax Act to submit that the legal challenge also has no basis.
He would submit that what this Court is dealing with in the present matter is
an entry tax. That is a subject dealt with by Entry 52 of List II of the VIIth
Schedule to the Constitution of India. Emphasising the language of this entry
Mr. Sonpal would submit that it provides for a tax on the entry of goods into a
local area for consumption, use or sale therein. Mr. Sonpal submits that mere
entry of the goods into a local area is not the taxable event. The taxable
event is entry of the goods into a local area for consumption, use or sale
therein. It is only in that event that liability to pay the tax arises and not
otherwise. The import of goods into the local area is not prohibited. It is their
consumption, use or sale therein which attracts the tax. Mr. Sonpal submits
that the petitioners do not dispute that import simpliciter does not attract
the levy. Accepting Mr. Dada’s contentions would be doing violence to the plain
language of the statute. Once the levy is on the entry of goods specified in
Column (II) of the Schedule to the Maharashtra Entry Tax Act into any local
area for consumption, use or sale therein, then, it is not permissible to
dilute the rigour of the provisions in that behalf. Mr. Sonpal submits that the
three provisos to sub-section (1) of section 3 would clarify 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 MVAT Act and the tax
payable by the importer under the Maharashtra Entry Tax 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. Therefore, if the goods attract the above tax in the State in
which they are purchased and thereafter they are imported into a local area,
then, and to that extent, the liability to pay the entry tax is reduced.
Lastly, Mr. Sonpal would submit that no tax is leviable or can be collected on
specified goods entering into a local area for the purpose of such process as
may be prescribed, if after such processing these goods are sent out of the
State. Mr. Sonpal relies upon the explanation to this sub-section and
thereafter sub-sections (2), (3), (4) and (5) of section 3 to submit that there
is no liability to pay entry tax in the event the goods are brought for the
purpose set out in sub-section (5) of section 3. He also relies upon the provisos
to sub-section (5) of section 3 in that regard.”

After noting the arguments as above, the Hon. High Court came
to a conclusion that no distinction can be made for the goods coming from out
of India or from any place within India. In other words, so far as goods are coming
from outside the State of Maharashtra, the entry tax would apply. The Hon. High
Court observed as under about validity of levy on the imported goods.

“85. Following it and applying it even to cases of octroi or
entry tax, the Hon’ble Supreme Court held conclusively that entry tax is a tax
on the entry of goods into any local area for consumption, use or sale therein.
So long as the levy is of this nature, it is wholly irrelevant as to from where
the goods have been brought. The statute’s provisions must be given their plain
and clear meaning. In other words, if the act of bringing in the goods is
termed as an import and this is also defined, and if the particular act
complained of falls within the definition, then there is no escape from the
levy. It is in this context that we must look at section 3 of the Act which
also has been reproduced by us above. We are not in agreement with Mr. Dada
that only those goods which have been brought within the local area from a
place outside the State of Maharashtra but within the territory of India will
attract the levy and not those goods which enter the local area after being
imported from abroad. The argument of Mr. Dada is that the expression
“outside the State” cannot mean outside the territory of India. We do
not find any support for such an argument. The reported decisions seem to hold
otherwise. Even otherwise, it is difficult to appreciate the implications of
this argument. It would lead to needless complexity and incongruous and
inconsistent results. For instance, if goods are imported into the port of
Mumbai, and used in Mumbai, then, according to Mr. Dada’s formulation, such
goods are not covered by the levy and entry tax is not attracted. But what
might happen if the goods were imported into Kandla, Vishakapatnam or Kolkata,
for instance, and transshipped from there, across other states, and then
brought into Mumbai? Such an entry or bringing in would be, even on Mr. Dada’s
formulation, subject to the levy, for the goods would be brought in from within
the territory of India though from outside the State of Maharashtra. It surely
cannot be suggested that all foreign imports are, by definition, exempt from
the levy of all local entry taxes. What, therefore, Mr. Dada’s argument amounts
to is saying that the local entry tax levy is not attracted where the port of
entry from abroad is within the state itself; but if the port of foreign import
is outside the state, then the entry tax levy is attracted. If this be so, then
it is a self-defeating argument and clearly shows that the mere importation
from abroad is not a reason to deny the levy of the local entry tax. We find
nothing in any judgment or the statute to support the proposition that the
situs of the port of foreign importation within the state furnishes any point
of exemption or escape from the local levy of entry tax.”

Conclusion

There are contrary judgments on the above
subject. Some of the High Courts have held that the entry tax, being
compensatory, can apply if the goods are coming in the State from any place
outside the State but within India and not imported from a foreign country.
However, the above judgment has settled the position so far as Maharashtra is
concerned and the liability will be attracted even for imported goods.

shailesh.kwebmaker

Insertion of Explanation in Entry Vis-à-Vis Effective Date

Introduction

Under the scheme of
Indirect Taxation, tax is attracted if the concerned goods are classified under
the taxable entry. There are instances when the entry is interpreted in a
particular manner. Subsequently the Government adds Explanation in the entry
for making its intentions clear. The dispute arises when such Explanation/s
have retrospective or prospective effect.

Taxation of Unmanufactured
Tobacco

Under Maharashtra Value
Added Tax Act, 2002 (MVAT Act), Entry A-45A exempts sale of unmanufactured
tobacco from levy of tax. However, an Explanation was added in said entry from
1.4.2002 stating that unmanufactured tobacco will not include the tobacco sold
in packages under a brand name. A dispute arose between assessees and Sales Tax
Department as to effective date of the Explanation. The view of Sales Tax
Department was that Explanation is clarificatory and it is effective
retrospectively from 1.4.2007 itself (since when the entry was existing) and
hence, liability arises retrospectively. The assessees were insisting that the
Explanation is substantive, hence effective from 1.4.2012 (i.e. from date of
insertion of such explanation) and hence no liability till 31.3.2012. In other
words, the issue was whether the given Explanation is clarificatory or
substantive.

The matter went to the
Bombay High Court, Aurangabad Bench in case of Amar Agencies (W.P. No.4944
of 2013) and others which was decided on 5.5.2017

Relevant Entry

The Hon. High Court has
reproduced the controversial entry and also given verdict on dispute as under:

“7. Upon consideration of
the arguments canvassed by learned counsel for respective parties, it is
manifest that we will have to deal with Entry 45A, it’s explanation, so also
entry 2401. For the sake of convenience, the same are reproduced below.

MAHARASHTRA VALUE ADDED TAX
ACT 2002

SCHEDULE A

1. ………

Before amendment

45A (a) unmanufactured tobacco covered
Nil 1.4.2007

under tariff heading No.
2401
to

of the Central Excise Tariff Act,
1985. 31.3.2012

After amendment

45A (a) unmanufactured tobacco covered Nil
1.4.2012

under
tariff heading No. 2401 to date

of
the Central Excise Tariff Act, 1985.

Explanation. For the removal of the doubts, it is hereby
declared that, the unmanufactured tobacco shall not include unmanufactured
tobacco when sold in packets under the Brand name.

8. The moot question would
be reading the explanation, as a substantive amendment or clarificatory.

9. Entry 45A of the Act of
2002 was amended by notification dated 31.03.2012 by the Government exercising
its powers u/s. 09 of the Act of 2002. Entry 45A as it stood prior to amendment
of 31.03.2002, it contained Clause B with no explanation. Vide notification
dated 31.03.2012 Clause B which dealt with biris is deleted and an explanation
is added. The bone of contention between the parties is the date of
applicability of amendment.

By the explanation, it is
declared that the unmanufactured tobacco shall not include unmanufactured
tobacco when sold in packets under the brand name. Prior to 31.03.2012, the
legislature did not make any distinction between unmanufactured tobacco sold in
brand name or otherwise. The Entry 45A is part of Schedule A, which details the
list of goods for which the rate of tax is nil. The unmanufactured tobacco
covered under tariff heading No. 2401 of the Central Excise Tariff Act, 1985 is
not taxable i. e. it’s tax is nil as per Entry 45A(a).

10. The Trade Circular,
under challenge, lays down that the said explanation is clarificatory in
nature. If the explanation is interpreted as a mere clarificatory, then the
question of its applicability prospectively or retrospectively may not arise.
When the explanation serves the purpose of clarification of the existing law,
there is no question of its prospective or retrospective operation, as the said
explanation would only explain and clear any mental cobwebs surrounding meaning
of statutory provision and to prevent controversial interpretation.
Explanations generally are intended more as a legislative exposition or
clarification of the existing law than as a change in it. If we go to the
literal words employed in the explanation, then the said explanation is
introduced for the removal of the doubts. The language of the explanation
depicts such intention. If the explanation is interpreted as merely clarificatory,
then the trade circular cannot be held to be erroneous.

11. Yet, we will have to
bear in mind that, the taxing statutes have to be interpreted strictly. We will
have to consider whether the incorporation of explanation to Entry 45A of the
Act of 2002 has altered the law as existing prior to the amendment dated
31.03.2012. While adding the said explanation, the entry 12 to Schedule D is
also amended.

12. As per section 9(1A) of the Act, the State
Government has the powers to amend the Schedule by adding or modifying any
entry in the Schedule. The notification dated 29.03.2007 was in force upto 31^st
March, 2012. Item B in the entry 45A is deleted with effect from 01.04.2012,
that would be interpretation of the fact that, notification dated 31.03.2012
operates prospectively. The trade circular dated 30^th March, 2007
clarifies that the unmanufactured tobacco cleared under Chapter Head 2401 of
the Central Excise and Tariff Act will be exempted from tax. The trade circular
dated 6^th August, 2009 also clarifies the same. Incorporation of
explanation has amendatory implication with effect from 1^stApril,
2012. The explanation in the notification dated 31^stMarch, 2012
will have to be held as amendatory and not clarificatory. We are only concerned
with the position prior to 31.03.2012. As from 1^stApril, 2012, the
unmanufactured tobacco sold in brand name is taxable. We are only concerned
with unmanufactured tobacco covered under heading 2401 of CETA.

13. Considering the trade
circular dated 30^thMarch, 2007 and 6^thAugust, 2009, it
would be clear that the Department considered the unmanufactured tobacco
covered under Chapter Head 2401 of the Central Excise and Tariffs Act exempted
from tax. The said position subsisted till 31.03.2012. It would appear that, no
distinction was made between sale of unmanufactured tobacco in packet or in
retail or whether branded or not branded. For the first time, the said
distinction is made by virtue of explanation to Entry No. 45A of the
Maharashtra Value Added Tax Act 2002.

14. The explanation no
doubt begins with the expression “for removal of doubts”. However,
the same does not appear to be plain and conclusive in nature. The operative
implication of the expression “for removal of doubts” in the explanation
does not show nexus to legislative intent of taxing liability. By virtue of
explanation, a particular class is created. By inserting explanation to Entry
No. 45A, new class is created i. e.
‘unmanufactured tobacco sold in packets under a brand name’. A distinction is
made for the first time by insertion of said explanation between the
unmanufactured tobacco sold in retail, loose and those unmanufactured tobacco
sold in packets under a brand name. The said distinction has been introduced by
way of an explanation. By reason of explanation a substantive law is introduced
and if a substantive law is introduced, wherein a class is created thereby
making it liable for tax, the explanation will have to be held amendatory to
operate prospectively and not retrospectively.

15. In the light of the
above, it will have to be held that the addition of explanation to Entry No.
45A under notification dated 31.03.2012 is substantive provision and it is not
merely clarificatory, as such would operate prospectively. It will have to be
held that, unmanufactured tobacco sold in packets under a brand name would not
be taxable from 01.04.2007 to 31.03.2012. The impugned trade circular 9T dated
30.06.2012 stating that explanation is merely clarificatory is held to be
erroneous to that extent.”

Conclusion

The judgment clears the
legal position. It is expected that the government will appreciate substance of
the judgment.

It is expected that there
should not be retrospective burden on tax payers by way of inserting an
explanation/s which when earlier it was understood that the goods / commodities
concerned were understood to be under an exempt category. We hope that under
GST era, there will be much better clarity of law and no ambiguous situations
will arise.

shailesh.kwebmaker

INTER STATE SALE VIS-À-VIS INTRA STATE SALE

Introduction

Whether transaction is Inter State
or Intra State sale is always a very delicate issue. The nature of transaction
depends upon facts of case. By now, there are number of precedents laying down
tests for deciding nature of inter-state sale. However, it still cannot be said
that it is a settled law.

Section 3(a) of the Central Sales
Tax Act (CST Act) lays down the principles to define inter-state sale.

Although, section 3(b) also
describes certain transaction to be inter-state sale but the same is not
discussed here.

Section 3(a) reads as under:

“S.3. When is a sale or purchase of
goods said to take place in the course of inter-State 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-

a. occasions the movement of goods from one
State to another; or ……………..…”

Thus, normal understanding is that
the sale which is linked with inter-state movement of goods is inter-state
sale. And it is also expected that same goods are moved, which are subject
matter of sale.

If the goods sold and goods
actually moving are different then it is difficult to say that there is
inter-state sale in the hands of seller. However, we find contrary judgments on
the issue as discussed here under.

Inter State sale under section 3(a) –
Scenario I

State of Tamil Nadu vs. Sun Paper
Mill Ltd. & Ors. (23 VST 191)(Mad)

The facts in this case, in words of
Hon. High Court are as under:

“The assessee – first respondent is
a public limited company, which is engaged in the business of manufacture and
sale of papers. They are dealers in newsprint and assessed on the file of the
Deputy Commercial Tax Officer, Ambasamudram, in TNGST 802529/93-94. The
relevant assessment year is 1993-1994. The assessee has effected sales of
newsprint to the tune of Rs. 25,07,671 during the assessment year to Tvl. Kerala
Sabdam and Tvl. Kollam Muthari, Kollam and claimed those sales as inter-state
sales. But the assessing officer rejected their claim on the ground that the
newsprints sold to them were not moved to another State. They were moved only
to Sivakasi and later the said newsprints were converted into news magazine in
Pioneer Press (P) Limited, Sivakasi and then the same were moved to Kerala.
Therefore, the assessing officer assessed the said turnover under the Tamil
Nadu General Sales Tax Act, 1959. Aggrieved by that order, the assessee filed
an appeal before the Appellate Assistant Commissioner (CT), Tirunelveli in CST
AP No. 345 of 1995. The Commissioner allowed the appeal on the ground that the
movement of goods from the State of Tamil Nadu to Kerala would certainly form
an inter-State transaction. Later, the Joint Commissioner (CT)(SMR) suo motu
revised the order of the Appellate Assistant Commissioner and treated the
transaction as local sales.

Assessee pursued the matter further
and ultimately came before Hon. Madras High Court by way of a Writ Petition.
After hearing parties, Hon. High Court ruled as under:

“After taking note of the
principles enunciated in the above Supreme Court judgments, we have to find out
whether there is movement of goods. The present case falls u/s. 3(a) of the
Act. There are two ingredients in the section, i.e., (i) it must be a sale of
goods; (ii) the sale occasions the movement of goods from one State to another.
In respect of sale, there is no dispute. We have to see here whether there is
sale occasioning the movement of goods. In the case on hand, the seller and the
buyer contemplated movement of goods from Tamil Nadu to Kerala. At the
instruction of the buyer, the goods were dispatched to Sivakasi, wherein
conversion took place and after conversion, the goods were moved to Kerala.
Because of conversion, it cannot be held that there is no movement of goods. It
is only for the purpose of section 5(3) of the Act that any goods undergoing
commercial change is relevant. It is not for the purpose of determining the
inter-state sale u/s. 3(a) of the Act.

Mere stoppage at Sivakasi and
conversion would not alter the character of the transaction. The stoppage and
conversion occurred only at the instance of the buyer at Kerala. There is no
dispute in respect of the contract. The goods were moved pursuant to the
contract. The goods dispatched to Sivakasi were not meant to be sold in the
open market. There is no restriction that the goods should be moved intact. It
is not for the Revenue to suggest that the goods must reach as it is. The
authorities, who are acting as guardian of the Revenue, must examine and
consider the transaction from the standpoint of a businessman. The yardstick is
that of a prudent businessman. Otherwise, first, the goods have to go to Kerala
and then betransported back to Sivakasi for conversion and once again after
conversion, it must go to Kerala. To avoid multiplicity of transaction, the
seller sent the goods to Sivakasi at the instance of the buyer and after conversion,
the same were sent to Kerala. There is no material available to show that the
goods are meant to be in Sivakasi. It is not the contention of the petitioner
that the goods were not moved from Tamil Nadu to Kerala. Stoppage and
conversion do not make the transaction a local sale. After applying the
principles enunciated in the judgments cited supra and also taking into
consideration the facts involved, we are of the view that the transaction
involved is only an inter-State sale.”

Inter State sale under section 3(a) –
Scenario II

Tamil Nadu Petro Products Ltd. vs.
Assistant Commissioner (CT), Fast Track Assessment Circle II, Chennai and
another’s (95 VST 118)(Mad)

The facts in this case, as narrated
by the High Court are as follows:

“2. The controversy which led to
the petitioner seeking for the clarification arose under the following
circumstances. HLL are engaged in the manufacture of detergents and they are
registered dealers on the file of the Assistant Commissioner (CT), Fast Track
Assessment Circle-II, Greams Road, Chennai, under the provisions of the TNGST
Act and the Central Sales Tax Act, 1956, (CST Act). HLL placed purchase order
dated 15.06.2000, for sale of LAB and for delivery of the same at M/s. Ultra
Marine and Pigments Limited, Ranipet, (Job Worker). The said purchase order was
raised by HLL from their Mangalore office. The job worker is required to
manufacture Acid Slurry from LAB and such product is stock transferred to the
factory of HLL at Mangalore. Therefore, the question arose as to whether the
petitioner can avail the concessional rate of tax on production of form-XVII
declaration.”

The following argument on behalf of
Revenue further clarifies the controversy:

“5. Mr. Manokaran Sundaram, learned
Additional Government Pleader appearing for the respondents submitted that the
petitioner entered into a contract with HLL, Mangalore for supply of LAB; a raw
material for manufacture of detergent and as per the agreement, it had to be
supplied and delivered to their job worker at Ranipet and later after
conversion of raw material as Acid Slurry, the same would be transported to
HLL, Mangalore for further processing and manufacturing as detergents.
Referring to the purchase order dated 15.06.2000, it is submitted that it
clearly shows the dealer at Mangalore had placed the purchase order and in
pursuance to the same, the petitioner had effected sale to the dealer at
Mangalore and the transaction is clearly an interstate sale and the only
difference being delivery has been made to the job worker at Ranipet and after
completion, for onward transmission to the purchaser at Mangalore.”

After examining controversy, the
Hon. High Court held as under:

“12. Undoubtedly, the products sold
by the petitioner was not the product which was moved out of the Ranipet
factory on stock transfer to HLL Mangalore. Thus, the factory at Ranipet had
manufactured a commercially distinct product than what was sold by the
petitioner to HLL. In other words, the products sold by the petitioner was LAB,
the product which was manufactured from LAB was Acid Slurry. In my view, it
would be unnecessary to test the present transaction based on whether the
product manufacture within the State was an intermediary product for
manufacture of another product outside the state.

14. If the case on hand is tested
on the anvil of the decision of the Hon’ble Supreme Court, it is not in dispute
that the contract of sale with the petitioner stood completed within the State
of Tamil Nadu upon delivery of the goods at Ranipet. The movement of the goods
after undergoing a process of manufacture and after being converted into a
commercially different product is an independent transaction and the
transaction could not be treated as an interstate element.”

Thus, the transaction of sale by
seller to buyer (HLL) is held to be intra state sale.

Conclusion

It can be seen that on similar
facts, the same High Court has given different rulings. Thus, the situation
becomes very uncertain. The dealer community remains in great confusion about
the correct tax to be collected from buyer. It is felt that the latert judgment
specifies correct scope of section 3(a) of CST Act for inter-state sale. The
goods sold and moved to other State should be same goods, else it will create
an unexpected situation.

It is expected that the controversy
will get settled by the later judgment. _

shailesh.kwebmaker

“Glass wall” vis-à-vis Construction Contract

Introduction

Under Sales Tax Laws, there are certain
provisions whereby a dealer can discharge his tax liability by way of a
simple method, called ‘composition scheme’, instead of the regular
method of working out liability to pay tax. Such ‘composition scheme/s’
are normally designed for smooth sailing, particularly in relation to
works contracts.

However, sometimes a method, which looks simple
and easy, may become very heavy and burdensome, just because of its
interpretation. Dealer/s opting for compositions scheme/s have to be
very careful. One recent judgment on interpretation of a ‘construction
contract’ may be an example.

Construction Contract

Under
erstwhile Maharashtra Works Contract Act,1989, a composition scheme of
5% was announced for ‘Construction Contract/s’. In other words, if the
contract executed by the contractor was covered by a notified
construction contract, then the contractor could adopt this composition
scheme, attracting a composition rate of 5%.

Notification

The
relevant notification, notifying ‘construction contract’ under Works
Contract Act, was dated 8.3.2000, which is reproduced below for ready
reference:

“Notification No.WCA -25.00/C.R.-39/Taxation-1 dated the 8 th March,2000.

In
exercise of the powers conferred by sub-section (1) of Section 6A of
the Maharashtra Sales Tax on the Transfer of Property in Goods involved
in the Execution of Works Contracts (Re-enacted) Act, 1989 (Mah.XXXVI of
1989), the Government of Maharashtra hereby notifies the following
contracts to be the construction contracts for the purpose of
sub-section (1) of the said section 6A, namely: –

A. Contracts for construction of –

(1)
Building, (2) Roads, (3) Runways, (4) Bridges, Flyover bridges, Railway
overbridges, (5) Dams, (6) Tunnels, (7) Canals, (8) Barrages, (9)
diversions, (10) Rail tracks, (11) Causeways, Subways, Spillways, (12)
Water supply schemes, (13) Sewerage Works, (14) Drainage works, (15)
Swimming pools, (16) Water purification plants.

B. Any
contract incidental or ancillary to the contracts mentioned in paragraph
A above, if such contracts are awarded and executed before the
completion of the said contracts mentioned in A above.”

A look
at the above notification shows that two categories of transactions were
covered by above notification. One category was Part (A), which was
relating to main activity of construction, and, the other category i.e.
Part (B) covered incidental contracts to above main contract, subject to
the condition that they should be executed prior to completion of main
contract.

Controversy in case of Permasteelisa (India) Pvt. Ltd. (Sales Tax Reference No.55 of 2014 dated 6.5.2016) (BHC)

The facts leading to above judgment are noted by the Hon. High Court in para (4) of judgment as under:

“4
The Applicant is a Private Limited Company incorporated under the
Companies Act, 1956. It is also a registered dealer under the MVAT Act.
The Applicant is engaged in activity of fixation of glass walls. It is
the case of the Applicant that these glass walls also known as curtain
walls are used in the construction of modern buildings. These glass
walls are permanent walls and are constructed instead of usual brick
walls. In the modern age of architecture these glass walls have replaced
the traditional brick walls and many buildings are constructed and
developed using glass walls. If the glass walls are erected for a
building, then brick walls are not required as these glass walls have
all the characteristics of traditional brick walls as a result of which
there are modern high rise buildings and skyscrapers. In applying the
rates as applicable under the Work Contracts Act, the Applicant has
relied upon the Notification dated 8 March 2000 in terms of which
certain contracts specified therein are identified as construction
contract eligible for beneficial rate of tax. According to the
Applicant, the activities it undertakes are in respect of construction
contracts or contracts incidental or ancillary to the construction
contracts as set out in the Notification dated 8 March 2000 and it has
raised invoices and filed returns accordingly.”

Contention of dealer

As
the Maharashtra Sales Tax Appellate Tribunal, held that the activity
undertaken by the dealer did not fall within the said notification of
‘construction contract’, the dealer preferred a reference to Bombay High
Court and submitted that the glass walls are replacing traditional
bricks walls.

The arguments were two fold. One, it was a
contract for construction of building covered by Part A. In the
alternative, it was argued that it was covered by Part B as an
incidental contract. The meaning of ‘building’ in Development Control
Regulation for Greater Mumbai,1991 (DCR) was cited. Further literature
was submitted explaining the “glass walls” concept. On behalf of
department the submission was that the contract for glass walls was
neither a building construction contract nor incidental contract.

Observation of High Court

Hon. High Court referred to the contract terms for given transaction. In para 12 the Hon. High Court observed as under.

“12.
We are of the view that the contracts for construction of glass walls
executed by the Applicant would not constitute ‘contracts for
construction of buildings’ as mentioned in paragraph ‘A’ of the
Notification dated 8 March 2000 nor would they constitute contracts
incidental or ancillary to any contract as mentioned in paragraph ‘B’ of
the Notification dated 8 March 2000 issued under section 6A(I) of the
Works Contract Act and would not be covered by the said Notification. In
the judgment and order dated 9 July 2010 of the Tribunal in Second
Appeal No.106 of 2007, the case of the Applicant is interalia recorded.
In paragraph 3 it is stated as follows: “…

The work is carried out as under:

“i) Contract for structural glazing is entered into on completion of foundation and plinth.

ii) O n signing of the contracts intensive planning and designing is undertaken by Architect and Structural Engineers.

iii) A luminum, silicon and glass of the desired prescription is ordered.

iv) U pon completion of 5th Slab, structural glazing commences from the bottom i.e. first slab.

v) Structural glazing gets completed along with concrete construction.

vi) I nstead of convention brick wall, glass walls are used.

vii)
Structural glazing of the building is something without `brick walls’.
Instead of “brick wall” a “glass wall” is constructed.

It is
further recorded in paragraph 4 that in respect of the assessment, the
Applicant’s case was that it had undertaken the contract of fabrication
and erection of structural glazing works and the work of aluminum
glazing contract would qualify as a construction contract made for
building liable to composition rate of tax. Being aggrieved by the
Assessment Order passed by the Sales Tax Officer, the Applicant had
filed an Appeal before the Deputy Sales Tax Commissioner (Appeals) and
in the order dated 1 November 2006, the Commissioner of Sales Tax
(Appeals) has recorded that the Applicant contended that “he is a dealer
dealing in structural glazing aluminum cladding, doors and windows and
doors of buildings in Corporate Offices.”

After referring to
further judgments cited and an order of Advance Ruling in Karnataka on
the very same activity, in para 17 the Hon. High Court concluded its
decision as under:

“17 The fabricated structural glazings
prepared by the Applicant are transported to the site by the Applicant
and affixed on the exterior portion of the building, which building is
constructed by the building contractor who is a third party. There is no
dispute that Applicant is not a building contractor, in that, it is not
in the business of construction and erection of buildings. The activity
of affixing glass and erecting glass walls with aluminium frame work
requires an altogether different expertise, and is ordinarily
sub-contracted by the building contractor. The contention that some of
the walls in the building are not required to be constructed by laying
bricks and they are substituted by affixing the glass would not carry
the case of the Applicant further. We are also unable to accept the
contention that the work of the Applicant would be covered under the
term “incidental or ancillary activity to the construction of the
building” as that would have to have a direct nexus to the construction
of the building itself. Therefore, the alternative argument that the
contract would get covered by paragraph B of the said Notification which
includes incidental or ancillary contract to the contract of
construction also cannot be accepted. What meaning is to be attached to
the word “building” as mentioned in the Notification would have to be
determined considering the facts and circumstances of each case. In our
view, the reliance on the definition of ‘building’ in the Regulation
2(3)(11) of DCR is misplaced and would not assist the Applicant in any
manner. That definition is in the context and purposes of DCR and cannot
be imported and applied in the facts and circumstances of the present
case.”

The Hon. High Court has rejected the plea of the dealer about its contract being covered by category of Construction contract.

Conclusion

While
effecting the transaction, a dealer contemplates liability by making
reference to available provisions. The composition schemes are meant for
easy method of working of tax liability on works contracts. The dealer
may not be seeking any tax saving, but basically looks at an easy and
smooth method of working.

Under above circumstances, if the
dealer is caught in litigation in regard to interpretation litigation,
it may cost him heavily as the tax liability may exceed even his profit
margin.

It is pertinent to note that under present MVAT Act also
there is almost a similar notification for ‘construction contracts’.
Dealers will have to interpret its scope in terms of this judgment. It
may be suggested that the Government should clarify the scope of such
notifications in more specific terms so that dealers (contractors) can
compute their liability with certainty.

shailesh.kwebmaker

Situs of sale vis-à-vis Motor Vehicle

Introduction
Under sales tax laws, one
of the contentious issues is about determination of ‘Appropriate State’
for levy of tax on sale /purchase transactions. In earlier days there
was much more confusion due to the nexus theory. Due to the said theory
more than one State tried to levy tax on the same transaction, however
the issue was resolved by introducing section 4(2) in the Central Sales
Tax Act, 1956 (CST ACT). It provides necessary guidelines for
determining a particular State which will be authorized to levy tax on
sale/purchase transactions.

Section 4(2) of the CST Act

Section 4(2) of the CST Act reads as under;
“Section 4. When is a sale or purchase of goods said to take place outside a State.

(1)….

(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State,
(a)
in the case of specific or ascertained goods, at the time of the
contract of sale is made; and (b) in the case of unascertained or future
goods, at the time of their appropriation to contract of sale by the
seller or by the buyer, whether assent of the other party is prior or
subsequent to such appropriation.

Explanation- Where there is a
single contract of sale or purchase of goods situated at more places
than one, the provisions of this sub-section shall apply as if there
were separate contracts in respect of the goods at each place.”

It
can be seen, from the above, that the sale is deemed to have taken
place in that state, where the ascertainment of the goods is done to a
particular sale contract. This is called ‘situs of sale’. Once it is
determined to be in a particular State, the sale remains outside the
taxation scope of all other States. Thus, only one State is entitled to
levy tax on a particular sale/purchase transaction based on
ascertainment of goods to the contract of sale. And in that State, the
transaction may be liable to local tax or CST as per the movement of the
goods. This had brought a very good relief to the dealer community as
it avoided multiple claims by different states.

Still determination of ‘situs of sale’ is not free from debate
In
spite of enactment of section 4(2) of the CST Act, still the issue
cannot be said to be free from litigation. There are situations where
one State tries to hold that ‘situs’ is in their state, though the
dealer might have paid tax in other State, considering the same as
proper State as per ‘situs of sale’.

Recently, Hon’ble Supreme Court had an occasion to deal with such an issue in case of Commissioner
of Commercial Taxes, Thiruvananthapuram, Kerala v/s M/s K.T.C.
Automobiles (Civil Appeal No. 2446 of 2007 dated 29th January, 2016.) The relevant facts noted by Hon’ble Supreme Court are reproduced below for ready reference:

“2.
The undisputed facts disclose that the respondent is in the business of
purchase and sale of Hyundai cars manufactured by Hyundai Motors
Limited, Chennai. As a dealer of said cars, both at Kozhikode (Calicut),
Kerala where their head office is located and also at Mahe within the
Union Territory of Pondicherry where they have a branch office, they are
registered dealer and an assessee under the KGST Act, the Pondicherry
Sales Tax Act as well as the Central Sales Tax Act. The dispute relates
to assessment year 1999-2000. Its genesis is ingrained in the inspection
of head office of the respondent on 1-6-2000 by the Intelligence
Officer, IB, Kozhikode. After obtaining office copies of the sale
invoices of M/s K.T.C. Automobiles, Mahe (branch office) for the
relevant period as well as some additional period and also cash receipt
books, cash book etc. maintained in the head office, he issued a show
cause notice dated 10-8-2000 proposing to levy Rs.1 crore by way of
penalty u/s. 45A by the KGST Act on the alleged premise that the
respondent had wrongly shown 263 number of cars as sold from its Mahe
Branch, wrongly arranged for registration under the Motor Vehicles Act
at Mahe and wrongly collected and remitted tax for those transactions
under the provisions of Pondicherry Sales Tax Act. According to the
Intelligence Officer, the sales were concluded at Kozhikode and hence
the vehicles should have been registered within the State of Kerala.
Therefore, by showing the sales at Mahe the respondent had failed to
maintain true and complete accounts as an assessee under the KGST Act
and had evaded payment of tax to the tune of Rs.86 lakh and odd during
the relevant period. The respondent submitted a detailed reply and
denied the allegations and raised various objections to the proposed
levy of penalty. The Intelligence Officer by his order dated 30-3-2001
stuck to his views in the show cause notice but instead of Rs.1 crore,
he imposed a penalty of Rs.86 lakh only.”

Thus, the issue before
Hon’ble Supreme Court was about determination of ‘situs’ for sale of
cars. The fact considered by the Hon’ble Supreme Court is about
ascertainment of car to a particular sale, so as to determine ‘situs of
sale’.

In this respect, the Hon’ble Supreme Court has observed and decided as under;
“15.
Article 286(2) of the Constitution of India empowers the Parliament to
formulate by making law, the principles for determining when a sale or
purchase of goods takes place in the context of clause (1). As per
section 4(2) of the Central Sales Tax Act, in the case of specific or
ascertained goods the sale or purchase is deemed to have taken place
inside the State where the goods happened to be at the time of making a
contract of sale. However, in the case of unascertained or future goods,
the sale or purchase shall be deemed to have taken place in a State
where the goods happened to be at the time of their appropriation by the
seller or buyer, as the case may be. Although on behalf of the
respondent, it has been vehemently urged that motor vehicles remain
unascertained goods till their engine number or chassis number is
entered in the certificate of registration, this proposition does not
merit acceptance because the sale invoice itself must disclose such
particulars as engine number and chassis number so that as an owner, the
purchaser may apply for registration of a specific vehicle in his name.
But as discussed earlier, on account of statutory provisions governing
motor vehicles, the intending owner or buyer of a motor vehicle cannot
ascertain the particulars of the vehicle for appropriating it to the
contract of sale till its possession is handed over to him after
observing the requirement of Motor Vehicles Act and Rules. Such
possession can be given only at the registering office immediately
preceding the registration. Thereafter only the goods can stand
ascertained when the owner can actually verify the engine number and
chassis number of the vehicle of which he gets possession. Then he can
fill up those particulars claiming them to be true to his knowledge and
seek registration of the vehicle in his name in accordance with law.

Because
of such legal position, prior to getting possession of a motor vehicle,
the intending purchaser/owner does not have claim over any ascertained
motor vehicle. Apropos the above, there can be no difficulty in holding
that a motor vehicle remains in the category of unascertained or future
goods till its appropriation to the contact of sale by the seller is
occasioned by handing over its possession at or near the office of
registration authority in a deliverable and registrable state. Only
after getting certificate of registration the owner becomes entitled to
enjoy the benefits of possession and can obtain required certificate of
insurance in his name and meet other requirements of law to use the
motor vehicle at any public place.

16. In the light of
legal formulations discussed and noticed above, we find that in law, the
motor vehicles in question could come into the category of ascertained
goods and could get appropriated to the contract of sale at the
registration office at Mahe where admittedly all were registered in
accordance with Motor Vehicles Act and Rules. The aforesaid view, in the
context of motor vehicles gets support from sub-section (4) of section 4
of the Sale of Goods Act. It contemplates that an agreement to sell
fructifies and becomes a sale when the conditions are fulfilled subject
to which the properties of the goods is to be transferred. In case of
motor vehicles the possession can be handed over, as noticed earlier,
only at or near the office of registering authority, normally at the
time of registration. In case there is a major accident when the dealer
is taking the motor vehicle to the registration office and vehicle can
no longer be ascertained or declared fit for registration, clearly the
conditions for transfer of property in the goods do not get satisfied or
fulfilled. Section 18 of the Sale of Goods Act postulates that when a
contract for sale is in respect of unascertained goods no property in
the goods is transferred to the buyer unless and until the goods are
ascertained. Even when the contract for sale is in respect of specific
or ascertained goods, the property in such goods is transferred to the
buyer only at such time as the parties intend. The intention of the
parties in this regard is to be gathered from the terms of the contract,
the conduct of the parties and the circumstances of the case. Even if
the motor vehicles were to be treated as specific and ascertained goods
at the time when the sale invoice with all the specific particulars may
be issued, according to section 21 of the Sale of Goods Act, in case of
such a contract for sale also, when the seller is bound to do something
to the goods for the purpose of putting them into a deliverable state,
the property does not pass until such thing is done and the buyer has
notice thereof. In the light of circumstances governing motor vehicles
which may safely be gathered even from the Motor Vehicles Act and the
Rules, it is obvious that the seller or the manufacturer/ dealer is
bound to transport the motor vehicle to the office of registering
authority and only when it reaches there safe and sound, in accordance
with the statutory provisions governing motor vehicles it can be said to
be in a deliverable state and only then the property in such a motor
vehicle can pass to the buyer once he has been given notice that the
motor vehicle is fit and ready for his lawful possession and
registration.”

Thus, there are number of intricate issues before
coming to decision about ‘situs of sale’. The judgment though relates
to sale of cars can also be a good guidance for other goods also.

Conclusion
In
above judgment, Hon. Supreme Court has discussed about the principles
of ascertainment of vehicle to a particular sale to a buyer. Hon.
Supreme Court has arrived at the conclusion that in case of motor
vehicle, the vehicle gets ascertained to the contract of sale only when
it is approved by the Registration Authority under Motor Vehicles Act
and that happens at the office of the registration authority. Therefore,
Hon. Supreme Court has held that the place of sale of motor vehicle is
such State of registration of vehicle.

This may have effect upon
inter-state nature of motor vehicle. Due to above interpretation that
the ascertainment towards sale of motor vehicle takes place at the place
of registration authority, it is possible to say that when the vehicle
is sold to an individual customer, which is liable for registration in
his name, there will not be inter-state sale even if such vehicle is
dispatched from another State. The sale will be local sale in the State
of registration of vehicle in the name of the buyer.

shailesh.kwebmaker

“Sale within State” – Nexus

Introduction
There existed prior to the amendment in the CST Act, a controversy about determining the ‘situs’ of sale i.e. the State where the sale has taken place and which is the State eligible to levy tax on such sale? There were situations where on one sale, different States were contemplating levy of tax. The State from where goods moved used to claim tax, the State where actually delivery was given was also claiming tax as well as other States, picking up some connection of sale transaction with their State like, receiving payment, raising of invoice and so on.

This was known as nexus theory.

To avoid such a multiple claim, the CST Act was amended. Section 4 was inserted in the Act to determine the ‘situs’ of sale. Section 4(2) is as under:

“Section 4(2) in the Central Sales Tax Act, 1956
(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State—

(a) in the case of specific or ascertained goods, at the time the contract of sale is made; and
(b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation.

Explanation.- Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of this sub-section shall apply as if there were separate contracts in respect of the goods at each of such places.”

The attempt was to crystallise the State of sale. It was provided that the sale will be in the State where the goods are ascertained in relation to contract of sale.

Thus, the nexus theory was given go by and only one State in which physically goods are ascertained in relation to contract of sale, is the State in which sale is deemed to have taken place.

Nexus Theory revisited
The issue has now again come up for discussion. Recently, the Hon. Bombay High Court had an occasion to deal with one such issue. The judgment is in the case of M/s. Raj Shipping (W.P.4552 of 2015 and others) dated 19-10-2015.

Facts of THE Case
The short facts of the case before the Hon. Bombay High Court were as under:

“In the additional affidavit, that is filed, the Petitioner states that it is engaged in the business, namely, Bunker Supplies. Bunker supplies mainly consist of supply of petroleum products such as high speed diesel oil (HSD), light diesel oil (LDO) and furnace oil (FO) to various incoming and outgoing vessels within or beyond the port limits of Mumbai Port. These outgoing vessels, to which the supplies are made, are located beyond approximately 1.55 nautical miles from the coast of Mumbai and are anchored in various anchorage points within the territorial waters of the Union of India, off the coast of Maharashtra. It is stated that the outgoing shipping vessel places an inquiry for the required quantity of HSD with the Petitioner. Pursuant to the inquiry made by the customer, the Petitioner gave a quote for their supplies. In many cases, the Petitioner enters into a formal agreement with their customers for the purchase of HSD. At page 86 of the paper book is one of the illustrative copy of such an agreement. Pages 86 to 89 of the paper book read as under….

81) Thus, pursuant to such agreement or an approval of a quote by the customer, the shipping vessel places a purchase order/nomination with the Petitioner for the required quantity and the name of the vessel to which the supplies are to be made. The illustrative copy of the purchase order/nomination is also at page 90 of the paper book. It is on receipt of the purchase order/nomination from the shipping vessel that the Petitioner, in turn, places a purchase order on any of the oil marketing companies such as M/s. Indian Oil Company Limited, M/s. Bharat Petroleum Corporation Limited, etc. Thereafter, the further documents are prepared, including the shipping bill, and once they are ready, the oil marketing company loads the required quantity of high speed diesel in the tank lorries, which then come to the barge loading point at Mallet Bunder along with the invoice copy of the oil marketing company.

82) The sister concern of the Petitioner owns self propelled barges having large cargo tanks (below deck) ranging from 40 thousand liters (40KL) to 200 thousand liters (200KL). The barges have pumps fitted on them with a flow meter in order to pump out the HSD to the vessel. These are similar to petrol pumps where petrol is sold to the regular customers. At the Mallet Bunder, the HSD supplied by the oil marketing company is decanted into the cargo tanks of the barges owned by the Petitioner. The entire activity of decanting is done under the supervision of a Customs Officer. After taking delivery of the HSD from the oil marketing company, the barges sail to the anchorage point of the nominated vessel.

83) Paras 12 to 15 at pages 82 and 83 of the paper book read as under:

12. After reaching the anchorage point of the nominated vessel, the HSD is pumped out of the barge into the fuel tank or bunker of the nominated vessel. Once the supply is complete, the Master or the Authorised Officer of the vessel acknowledges the receipt of the ordered quantity of HSD on the Bunker Delivery Note (BDN) and the Shipping Bill. An illustrative copy of the Bunker Deliver Note (BDN) duly acknowledged by the officer of the vessel is marked and annexed as Exhibit “7”.

13. The barges go beyond 1.54 Nautical Miles from the base line of the coast of Mumbai to deliver the HSD to the vessels anchored therein, in the territorial waters of the Union of India.

14. After the delivery of the HSD to the nominated vessel is complete, the Petitioner raises an invoice on the shipping line based on the BDN. An illustrative copy of the invoice raised by the Petitioner is marked and annexed as Exhibit “8”. The Petitioner invoices the shipping line for the quantity of HSD actually delivered, along with charges for transportation and hiring of the barge belonging to its sister concern companies. These may be way of a lumpsum rate/KL previously agreed to by the Petitioner or the charges for sale of HSD and transportation may be indicated separately in the invoice.

15) The sister concern of the Petitioner separately charges the Petitioner company for the hire of the barge by the Petitioner company for the purpose of the supplies to be made to various customers. An illustrative copy of a credit note issued by the Petitioner in favour of its sister concern is marked and annexed as Exhibit “9”.”

Arguments of Petitioner
Based on the above facts, the argument of the petitioner was that the sale cannot be said to be in the State of Maharashtra. The territorial water was contended to be not part of the State and hence, the State had no jurisdiction, when sale was taking place in the territorial waters.

Alternatively, it was contended that there could be a tax liability under CST Act but not under MVAT Act. It was also contended that if at all there was a liability in the State, then it would be exempt under the Notification issued u/s.41(4) bearing no.VAT -1505/CR-135/Taxation-1 dated 30-11-2006 wherein sale of motor spirits by retail outlet was exempted from the levy of VAT .

On behalf of Revenue, the arguments were opposed, stating that the State has power to deal with impugned sales.

Hon. Bombay High Court
After considering the facts, contentions & citations from both sides, the Hon. High Court observed as under:

“95) If we apply this principle to the facts and circumstances of the present case, we do not have any hesitation in concluding that it is the goods which have been produced or manufactured or refined by the oil companies and which are drawn from their storage tanks in fixed quantity that are supplied on demand to the Petitioner. The manufacturers as also the refineries are very much within the State of Maharashtra viz. at Mumbai. The Petitioners are at Mumbai. Meaning thereby, their place of business is at Mumbai. It is from that place that the Petitioner requests the oil companies to supply to it the high speed diesel. It is received by the Petitioner from the oil companies at Mumbai. It may be that the Petitioner treats this as a contract on which they paid the sales tax as a component of the price. However, it is that very high speed diesel and supplied to the Petitioner at Mumbai which is carried from Mumbai in furtherance of a contract with parties like M/s. Leighton, which contract is also placed and finalised from Mumbai, through the barges of the Petitioner to the vessels of M/s. Leighton and which may be stationed in the territorial waters. However, Leighton comes in the picture, as have been stated by them, for the purpose of fulfilling a contractual obligation of M/s. ONGC. It is for that obligation to be discharged that they have deployed the vessels. It is these vessels which require the bunker supplies and which supplies are met by the Petitioner. The subject matter of the contract with M/s. Leighton is this high speed diesel or motor spirit which is taken and carried from Mumbai. Therefore, there is sufficient territorial nexus for the Maharashtra Value Added Tax Act to apply and to be invoked to the later sale by the Petitioner of the same goods to M/s. Leighton and other entities similarly placed. We do not see how the Petitioner can escape compliance with this legislation and by contending that the contract of M/s. Leighton being a distinct contract, the sale taking place in territorial waters that the sales tax legislation or the VAT legislation of the Maharashtra State would be applicable. Its applicability has to be tested by applying the above principles and particularly the nexus theory. After having found sufficient territorial connection, namely, between the back to back transaction and the taxing authority that we are not in a position to agree with Mr. Sridharan that MVAT Act is inapplicable.”
Thus, the Hon. Bombay High Court observed that tax applicable can be decided on the nexus theory.

With these observations, the Hon. Bombay High Court has remanded the matter back to authorities under State Act for deciding the correction position.

In other words, there is no finality regarding the issue and it is left to the appellate authorities to decide the taxability including under MVAT /CST and exemption u/s 41(4).

Conclusion
There was a great sigh of relief with the enactment of section 4(2) in the CST Act. It was felt that once the sale is established to be out of state (on which state claimed tax) based on physical ascertainment of goods, there was no taxability in such State. Therefore, it was also felt that if sale is proved to be in an area not falling within the State claiming tax, the claim of non taxability in such State would be upheld.

Some of the expectations from above judgment were about State boundaries, the situs of actual event of sale, the fate of sale taking place in territorial waters etc., in clear terms. However, the said issues remain still burning and are left to be decided by the State Authorities. It is possible that though sale is outside State, still, based on nexus theory the State authorities may attempt to levy tax on such transactions.

Dealers/State may be required to go in for a second round of litigation after the issues are dealt with by the State authorities in assessment, appeals etc. Let’s hope for finality at the earliest.

shailesh.kwebmaker

Transportation activity vis-à-vis Lease of Vehicles

Introduction
It is always a debatable issue as to whether transportation activity is a service or it is an activity involving leasing of vehicles. Transportation can be of goods or of passengers. Normally, in transportation activity the respective vehicles like trucks or buses are operated by the owners. However, there can be different kinds of agreements. If the relevant agreement is held to be an agreement for service then it may be liable for service tax, but there will not be any liability under the State VAT laws. However, if the transaction is determined to be a transaction of leasing vehicles, then VAT will apply.

The situation depends upon facts of each case. There are number of judgments having different interpretations. Recently, Maharashtra Sales Tax Tribunal (MSTT) had an occasion to deal with one such issue.

Buthello Travels vs. State of Maharashtra (VAT A.No.1135 of 2015 dt.11.12.2015)

Facts
The Hon. Tribunal has noted the facts as under: “12. Now in this case the issue agitated before us, which is regarding the amount received by the appellant from PMPML towards hire charges of the buses. In this context it would be useful to refer the settled legal position. The legal position is referred by Andhra Pradesh High Court in the case of State Bank of India and Others vs. State of Andhra Pradesh (70 STC 215). The principle is as under-

“With that there is a transfer of the right to use or not is a question of fact which has to be determined in each case having regard to the terms of contract under which there is said to be a transfer of right to use.”

The second principle laid down is that the agreement has to be read as a whole to determine the nature of transaction. Therefore, it is very essential to refer to the Lease Agreement for Hiring of Buses. In view of the above, we reproduce herewith some relevant portions of the agreement dated 22nd July 2004:

“Whereas
a) Pune Municipal Transport (PMT) intends to expand and augment its existing fleet of passenger buses.
b) to achieve the same, Pune Municipal Corporation suggested to hire passenger buses. Accordingly PMT published a tender notice as on 28/04/2003 in Marathi and English newspapers.
c) in response to the above advertisement 1 of the bidder is present contractor who is second part of this Agreement submitted his tender as per the terms and conditions thereof.

Now therefore this agreement witnesseth and it is hereby agreed by and between the parties as follows: 1

) This agreement will come into force only after buses are handed over by the contract work to PMT as per schedule “B”, duly registered with RTO Pune and permitted by RTO Pune to ply the buses on stage carriage permits held by PMT and no liability will be incurred on PMT till the agreement comes into force.

2) Buses must comply to the specification as enumerated in Annexure ‘A’ and the number and size of buses to be provided shall be as per Annexure ‘B’.

3) Tenure of the Agreement will be for a period of 5 (five) years from the date of permission to ply the buses of contract on PMT permit granted by RTO Pune.

4) The hired buses will be registered with RTO Pune in the name of PMT as lessee and will be operated as stage carriages within operational area of the PMT. The medium buses will be operated minimum 7,000 km per month, the minibuses will be operated minimum 6,000 km. per month, subject to the reasonable daily operation.

5) (i) the PMT will provide conductor with tickets, way bill and other conductor’s equipment.
(ii) It shall be the right of PMT to collect the fare charges. The fare charges will be credited to the account of PMT. The contractor shall not have any right to claim over the cash collection for any reason whatsoever.
(iii) The conductor of the bus alone shall collect all the fare and luggage charges. Neither the private bus contractor nor the driver who shall have any claim on the fare and luggage charges or any amount so collected.

6) The General Manager PMT shall have sole discretion to identify the routes on which hired buses shall be deployed. The contractor shall have no right to claim any particular route for operation.

(7) Responsibilities of the Contractor
(i) To provide the bus with driver possessing valid driving license with P.S.V. badge and complying PMT norms and certificate of medical fitness from competent authority. Driver shall follow the instructions of the authorities of the PMT. The driver will have to undergo training and test of driving. If necessary, driver should undergo medical examination by the medical officer of the corporation. Only successful driver will be approved. Expenditure of the training of the driver by PMT will have to be borne by the contractor. Driver must fulfill the norms prescribed by PMT. The driver should have knowledge of Pune City. However Contractor will be permitted to employ the surplus bus drivers employed with PMT where the post of drivers has become surplus on the Establishment of PMT.
(ii) It will be the responsibility of contractor to ensure that driver maintains close coordination with conductor and provide facilities to passengers and ensure that the passengers are not put to any inconvenience. The driver should have polite behavior with public and passengers and PMT staff.
(iii) The contractor shall not employ a person as a driver for operating a bus on hire basis who has been removed or dismissed, retired on superannuation from the service of PMT or any other Public Undertaking. Also driver must be of the age less than 58 years. Driver who has met with a fatal accident during the contract period should not be continued for 2 months.

Thereafter the driver will be continued by the contractor on his satisfaction given in writing to the PMT that the driver was not at fault for the accident.

(iv) The contractor shall provide uniform to the driver as prescribed by the PMT. The contractor shall provide an identity card with photo attested by contractor and PMT to the driver. Contractor shall furnish photo copy of the driving license of the driver to PMT.
(vi) The contractor/driver shall scrupulously follow instructions issued by the PMT periodically. As and when the PMT finds behaviour and conduct of the driver questionable, upon the notice, the contractor of hired buses shall replace him with the substitute driver immediately. If the private bus contractor fails to replace such a driver within a period of 7 days of notice thereafter, the bus assigned to that driver shall be liable to be discontinued without prior notice and no hire charges will be payable to contractor.
(xiv) The contractor shall produce the vehicle for inspection at the time of deployment and also subsequently whenever required by the PMT.
(xv) Contractor shall inform the place where he will be parking the vehicles and place where he will be repairing the vehicles. This may be checked by PMT authorities.

8) Calculation of kilometres of hired buses
(iii) Distance operated for making payment will be reckoned from appointed terminus for plying vehicles as per the kilometers of the trip distance as per time table.
(iv) Cancelled kilometers on account of mechanical breakdown enroute and any other reasons beyond the control of PMT shall be deducted.
(v) The contractor shall make available the bus for a minimum 16 hours a day. In case bus is not made available minimum 16 steering hours a day, it will not be counted as a day for the purpose of reckoning the number of days operated in a month.
(vi) In case of cancellation of trips for any reasons deduction shall be made and actual kilometres operated be reckoned for payment for hire charges.
(vii) In case of breakdowns PMT can divert the passengers to any other hired bus or bus of PMT. On such occasion the kilometers from the point of the breakdown to the destination point shall be deducted.
(viii) Increase in kilometers due to enforcement of law and order shall not be reckoned for hire charges where PMT has not changed its fare structure. …”

There are further terms which are not reproduced here for the sake of brevity.

The Hon. Tribunal has referred to number of judgments cited byboth the sides about nature of lease transaction. Hon. Tribunal has referred to judgments including that of Bharat Sanchar Nigam Ltd. (145 STC 91)(SC) and also considered the criteria laid down in the said judgment about nature of lease transaction.

After referring to citations, the Hon. Tribunal has arrived at the following conclusion.

“13. After having perused the copy of Agreement between the appellant and PMT, it becomes amply clear that the appellant has given the buses on hire to PMT for a specified period. During the entire period of contract, and when the buses are standing idle or have free time or are not being used by PMT, the contractor (appellant) is prohibited from using these same buses for his personal use or gain. This proves that, during this period of agreement the buses along with the drivers are completely at the disposal and under the control of PMT. Now we need to address the appellant’s claim that he is not a ‘dealer’ as defined under section 2 (8) of MVAT Act. In support of his claim the appellant has relied on the judgment of Honourable Bombay High Court in the case of Commissioner of Sales Tax, Maharashtra State, Mumbai vs. General Cranes [2015] 82 VST 560 (Bom).

14. In order to determine whether there is a transfer of right to use goods so as to make the contract one of sale under article 366 (29 A) (d) on the point of law, both the parties are unanimous that the test is of effective control and possession with respect to the goods.

In para 13 of the judgment of Honourable Bombay High Court, in the case of Commissioner of Sales Tax, Maharashtra State, Mumbai vs. General Cranes [2015] 82 VST 560 (Bom), their Lordships observed that, “In the present case, the permissions and licenses with respect to the cabs are not available to the transferee and remained in control and possession of the respondent. It is the driver of the vehicle who keeps in his custody and control the permissions and licenses with respect to the Maruti Omni Cabs or the said permissions and licenses remained in possession of the respondent. These are never transferred to M/s NDPL. It, therefore, cannot be said that there is a sale of goods, as transfer of right to use in as much as a necessary ingredient of sale, the transfer of right to use the goods, is absent”.

15. In the present case before us, it is very crucial to understand the nature of transaction. It is broadly outlined, as we understand from the records and documents placed before us. The Pune Municipal Transport is a public transport undertaking established as per the provisions of section 66 (20) of the BPMC Act 1949, to cater to the needs of commuters in and around the Pune City, who holds the stage carriage permits. The appellant does not hold or own stage carriage permit.

It is agreed between the parties that, the buses must comply with the specification as enumerated in the terms and conditions of the agreement. Tenure of the agreement will be for a period of 5 years from the date of permission to ply these buses of contractor on PMT permit granted by RTO , Pune.

16. On perusal of the copy of the agreement before us, it clearly specifies that the buses should be registered in the name of PMT as lessee. Clause number 15 of the agreement indicates that, the copy of the RC book, insurance policy and fitness certificate of the bus be deposited with PMT or duly exhibit the copy of the documents in the bus. This clearly exhibits that, overall custody and control of the documents is with the PMT. The admitted position which emerges is that, PMT is made available with the legal consequence and legal right to use the goods, namely the permissions and licenses with respect to the goods. This being the factual difference in the present case and the case of Commissioner of Sales Tax, Maharashtra State, Mumbai vs. General Cranes [2015] 82 VST 560 (Bom), the appellant is rightly held as a dealer under the MVAT Act, and assessed as unregistered dealer.”

Thus, The Hon. Tribunal has considered the given transportation activity as liable to tax under MVAT Act as Transfer of Right to Use goods.

A further position considered by the Hon. Tribunal is that, there were receipts for other transportation where the facts were not same as discussed above. Hon. Tribunal has directed the deletion of tax on such receipts. The said direction is as under:

“17. In our considered opinion, all the criteria as set out by Honourable Supreme Court in the judgment in the case of Bharat Sanchar Nigam Ltd. and another vs. Union of India and Others [2006] 3 VST 95 (SC), are satisfied. Therefore, we have no hesitation to determine the impugned transaction with PMT as a sale, as per section 2 (24) Explanation – (b) (iv) of MVAT Act, liable to tax. However, on perusal of assessment order it is observed that the assessing officer has taxed the total income of the appellant, which includes bus hire receipts from other customers. In our considered opinion the appellant is entitled to relief of tax including consequential interest and penalty levied on the turnover of income from other customers, other than PMT.

Hence, we pass the following order.”

Conclusion
Thus, the situation about attraction of service tax or VAT in relation to transportation activity is to be seen in light of individual facts and terms of agreement. As different facts are considered by courts, broad principles will gradually emerge.

shailesh.kwebmaker

Inter-State Transfer for Job work vis-à-vis Requirement of ‘F’ forms

Introduction
Section 6A of Central Sales Tax Act, 1956 (CST Act) requires that, if there is any inter-state transfer to branch or agent or principal, as the case may be, then ‘F’ form is required to be obtained from transferee. If such form is not obtained, it will be deemed to be inter-state sale for all purposes of CST Act.

Section 6A refers to inter-state branch transfer or to agent/ principal (collectively referred to as ‘branch transfer’). However, in addition to branch transfer of stock, there is also inter-state branch transfer for job work. Like, a dealer in Gujarat may send his goods for processing to its job worker in Maharashtra. Job worker will complete the processing and send processed goods to its employer i.e. the dealer who had sent him goods for process.

In this case, there are two transfers, one from Gujarat to Maharashtra and again from Maharashtra to Gujarat.

Difference between Branch Transfer and Job Work Transfer
The stark difference between branch transfer and job work transfer is that the branch transfer is to oneself. However, in case of job work transfer the transfer is to independent job worker. The relationship is of principal to principal and job worker charges its own processing charges for the same. In other words, the relationship in job work transactions is like seller and buyer. If any goods are involved in the process, which gets transferred to principal then job worker may be liable to discharge works contract liability on such processing charges.

Though ‘F’ form is required for inter-state branch transfers, it was not contemplated in relation to job work transfer. In fact the Commissioner of Sales Tax, Maharashtra State has issued circular bearing no.16T of 2007 dated 20.2.2007 explaining the above position and stating that F forms not required for job work transfers.

Judgment of Hon. Allahabad High Court in case of Ambica Steel Ltd . (12 VST 216)(All).
The requirement of obtaining of F forms again came in light when the Hon. Allahabad High Court had an occasion to decide a similar issue. In that case, the dealer challenged the requirement of ‘F’ forms for job work transfer.

The Hon. Allahabad High Court ruled that F forms are necessary for job work transfer and also upheld validity of the requirement.

The Commissioner of Sales Tax, Maharashtra State, again issued circular bearing no.5T of 2009 dated 29.1.2009 reiterating its earlier view that inspite of above judgment of the Hon. Allahabad High Court, legally F forms are not required for job work transfer.

However, M/s. Ambica Steel Ltd. went to the Supreme Court against the Allahabad High Court judgment. In the Supreme Court, the dealer did not contest the legality of requirement of F forms as per section 6A but got case remanded back on premises that it will be producing forms before assessing authority.

The Hon. Supreme Court accordingly disposed of the matter vide judgment reported in case of Ambica Steel Ltd. (24 VST 356)(SC).

Based on the above Supreme Court judgment, the Commissioner of Sales Tax, Maharashtra State, again issued circular bearing no.2T of 2010 dated 11.1.2010 withdrawing earlier circulars and advising for obtaining ‘F’ forms for job work transfers also. One more circular bearing no.12T of 2010 dated 22.3.2010 was issued stating that the withdrawal is prospective i.e. from 11.1.2010.

Based on the above circulars, the sales tax authorities have started levying tax under CST Act when F forms are not available for inter-state job work transfers.

The Bombay High Court on the above issue
Based on one such assessment order, the issue was contested before the Hon. Bombay High Court in case of Johnson Matthey Chemicals India Pvt. Ltd. vs. State of Maharashtra (W.P.No.7400 of 2015 along with W.P.No.7934 of 2015). The said writ petition was decided vide judgment dated 16.2.2016.

The facts in case of this writ petition are narrated by the High Court as under:

“4) The Petitioner holds a registration number as set out in para 4 of the Petition. It is claimed that the Petitioner is manufacturer and job worker, engaged in the manufacture of different grades of support catalyst, including activated charcoal support. It is stated that this is predominantly a process resulting in the production of recharged catalyst from spent catalyst. It is stated that the Petition relates to job work transactions. The Petitioner receives a specified quantity of spent catalyst from its customers from within as well as outside the state of Maharashtra. The Petitioner undertakes job work of converting the spent catalyst received from the customers into support catalyst and sends back the recharged support catalyst to such customers.”

The basic arguments of the petitioner were as under:
i) The intention of insertion of section 6A was to refer to branch transfers, as there were chances of evasion.
ii) Only branch transfers are covered by Section 6A as clear from language used in section 6A.
iii) No provision in Act/Rules to obtain ‘F’ forms where transactions are between principal to principal.
iv) Section 6A(1) will operate when there is actual interstate sale and failure to bring F form, and not otherwise.
v) Section 6A will aid section 6 to levy tax on otherwise completed inter-state sale, but not otherwise.

The Respondents argued that section 6A applies to all non sale inter- state movements and it is merely rule of evidence.

Having noted arguments from both sides, the Hon. Bombay High Court has concurred with the judgment of the Allahabad High Court in case of Ambica Steel Ltd. (12 VST 216)(All). The observations of the Hon. Bombay High Court are as under:

“46) We do not think that there is any ambiguity in the legal position. Further, we do not see anything ambiguous or vague in the circular issued by the State of Maharashtra after this judgment in the case of Ambica Steels Limited (supra) by both, the Allahabad High Court and the Hon’ble Supreme Court of India. We are of the firm view that furnishing and scrutiny/verification of the declaration in that form is a requirement in law and if that is fulfilled, the burden on the dealer is taken to be discharged. If that declaration is not furnished, then, the consequences follow. The goods might have been dispatched for job work and not as and by way of sale, but that is the plea or case of the dealer. If that is the case and the burden is on him to prove it, then, he has to obtain the declaration. If the declaration is not being issued by some States in the form prescribed, namely form ‘F’ and the dealer made all the efforts to obtain it but failure to produce it is not his fault, then, he may, as the Hon’ble Supreme Court of India clarifies, request the Assessing Officer to take that circumstance into consideration. If that request is made, the Assessing Officer can, depending upon the facts and circumstances of a particular case, pass such orders as are permissible in law. Therefore, we do not agree that the circular of 2010 misinterprets the order of the Hon’ble Supreme Court of India. It neither misreads nor misinterprets the judgment of the Allahabad High Court.

Throughout ,the understanding is that the burden is on the dealer and he has to discharge it in the manner prescribed in law. If the burden has to be discharged in the manner set out, then, no other mode or manner is permissible. Therefore, all that the Hon’ble Supreme Court clarifies is that if some States are not issuing ‘F’ form, then, that approach of a particular State should be brought to the notice of the Assessing Officer in the dealer’s State. That the Assessing Officer should be convinced that the dealer made all efforts, but for no fault of his, he could not obtain the ‘F’ form. Thereupon and pursuant to the liberty given by the Hon’ble Supreme Court of India and the dealer raising the plea, the Assessing Officer, while taking note of it, would consider the peculiar facts and circumstances and may pass requisite orders.

Even that is not the rule but an exception. The requirement is not displaced necessarily and as urged. We do not, therefore, see any merit in the contentions of Mr. Sridharan and while challenging the circular of 2010.” (underlining ours)

shailesh.kwebmaker

Concept of “Gross Receipts” vis-à-vis MVA T Rules, 2005

Introduction
Under the Maharashtra Value Added Tax Act, 2002 (MVAT Act) and the Maharashtra Value Added Tax Rules, 2005 (MVAT Rules), the dealers are entitled to a set off. However, they are subject to conditions as may be prescribed in the Rules. For example, Rule 52 of MVAT Rules which prescribes eligibility to set off reads as under:

“52. Claim and grant of set-off in respect of purchases made during any period commencing on or after the appointed day.

(1) In assessing the amount of tax payable in respect of any period starting on or after the appointed day, by a registered dealer (hereinafter, in this rule, referred to as ‘the claimant dealer’) the Commissioner shall subject to the provisions of [rules 53,54,55 & 55B] in respect of the purchases of goods made by the claimant dealer on or after the appointed day, grant him a set-off of the aggregate of the following sums, that is to say,

(a) the sum collected separately from the claimant dealer by the other registered dealer by way of [tax] on the purchases made by the claimant dealer from the said registered dealer of goods being capital assets and [goods the purchases of which are debited to the profit and loss account or, as the case may be, the trading account],

(b) tax paid in respect of any entry made after the appointed day under the Maharashtra Tax on the Entry of Motor Vehicles into Local Areas Act, 1987, and

(c) the tax paid in respect of any entry made after the appointed day under the Maharashtra Tax on the Entry of Goods into Local Areas Act, 2003.

(d) the purchase tax paid by the claimant dealer under this Act.”

Thus, to find out actual availability of set off reference is required to be made to Rules like Rules 53 & 54. Rule 53 prescribes reduction in set off whereas Rule 54 is about a negative list.

Rule 53(6)(b)
One of the Rules prescribing reduction in set off is rule 53(6). Rule 53(6)(b) is applicable to dealers in general. The said rule is reproduced below for ready reference.

“53. Reduction in set-off. –

(6) If out of the gross receipts of a dealer in any year, receipts on account of sale are less than fifty % of the total receipts, –

(a) …

(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 from the date of effect of the certificate of registration.

Explanation.- For the purposes of this sub-rule, “receipts” means the receipts pertaining to all activities including business activities carried out in the State but does not include the amount representing the value of the goods consigned not by way of sales to another State to oneself or one’s agent.” It can be seen that the rule provides for reduction or, in other words, restricted set off, when the receipts from sales are less than 50% of gross receipts. The Explanation under rule 53(6)(b) also provides meaning of gross receipts. There are disputes about meaning of gross receipts and how to compute it.

It can also be noted that if receipts from sales are less than 50% of gross receipts then set off is eligible only in respect of purchases which are sold within six months from the date of purchase. Therefore, the goods which are not sold like, consumed capital goods or goods which are not sold within six months are not eligible for set off.

Mutual Funds
Recently there was a controversy in relation to availability of set off to Mutual Funds. The Hon. M. S.T. Tribunal had an occasion to decide such an issue in case of UTI Mutual Fund (VAT SA 100 to 102 of 2014 dt.22.9.2015). The facts as narrated in the judgment are as under:

“The Appellant is a mutual fund registered with the Securities and Exchange Board of India (SEBI) and is regulated under the SEBI (Mutual Funds) Regulations, 1996. UTI Gold Exchange Traded Fund (UTI GETF) is one of the schemes of the Appellant and the same is also regulated by SEBI under the SEBI MF regulations.

3. As per the SEBI MF regulations, the balance sheet and revenue accounts of each scheme are required to be prepared separately and audited separately and no consolidated balance sheet of various schemes of a Mutual Fund is prepared. Thus, each scheme has a separate entity including separate receipts, funds, assets liabilities, etc.

4. As per the MVAT provisions, VAT is applicable on the turnover of sale of goods and the definition of goods specifically excludes securities. Therefore only UTI GETF is subject to VAT and not the other schemes of the Appellant as other schemes invested in securities and not in gold.

The Appellant obtained VAT registration simultaneously with the launch of UTI GETF and not earlier despite the other schemes of the Appellant dealer being in operation much before that. Thus the Appellant is assumed the role of dealer only on the launch of UTI GETF scheme and only this scheme should be considered and not any other scheme of the Appellant.”

From the above, it can be seen that the Mutual Fund has receipts from various schemes like relating to securities, gold etc.. Over all, the sales receipts are from the sale of gold whereas there are other receipts towards securities etc.. The main issue involved was whether the gross receipts should be computed considering receipts from all the schemes or only from gold scheme separately.

The argument was that under MVAT Act, only sale of goods can be considered as receipts and not other receipts which do not involve goods like shares, securities etc..

The Hon. Tribunal has dealt with the issue in the following words:
“The Learned representative of revenue has relied on the judgment of this Tribunal reported in the case of M/s. UTI Mutual Fund (present Appellant) vs. State of Maharashtra reported in 2013 (ST1) GJX 0626 STMAH wherein it is observed:-

“The set-off u/s. 48(1)(a)(ii) of MVAT Act is circumscribed with limitations. The limitations are (i) circumstances, (ii) conditions (iii) restrictions, as may be specified in the Rules. Rule 53 prescribe reduction in set-off in full or part, particularly Rule 53(6)(b) MVAT Rules prescribe restriction. Restriction is in the nature of duration of purchase and its sale. The restriction is where the receipts on account of sale are less than 50% of the total receipts, the setoff is permissible only on those purchases effected in that year where corresponding goods sold or resold within six months from the date of purchases. The “receipts” are explained in explanation. ”Receipts” means the receipts pertaining to all activities, including business activities carried out in the State.”

On the plain reading of section 48(1)(a)(ii) of MVAT Act r/w Rule 53(6)(b) and Explanation of MVAT Rules, it is clear that the receipts would include all activities of the dealer including business activities. Receipts which are concerning the activities not involving the sale of goods, are also included in “Total Receipts” in Rule 53(6) of MVAT Rules. The submission of Smt. N. R. Badheka does not have a legal base in law. Rule 53(6)(b) and explanation are within delegated powers conferred by section 48(1) of MVAT Act.”

26. The Learned Advocate Smt. Badheka has strongly contended that UTI GETF is dealing in equity and therefore only the receipts pertaining to the activity of UTI GETF ought to have been considered for grant of set off u/r. 53(6)(b) of MVAT rules. However, on going through the explanation attached to 53(6)(b), we find that the receipt means receipts pertaining to all activities including business activities carried out in the state and therefore in our considered opinion, the other activities of UTI Mutual Fund are also required to be taken into consideration while calculating the receipts for the purposes of set off as they are also business activities carried out in the State.

27. The basic rule of interpretation is laid down by the Hon’ble Apex Court in the case of Union of India and Others vs. Priyankan Sharan and Another (LIS/ SC/2008/1228) wherein it is observed:

“It is a well settled principle in law that the Court cannot read anything into a statutory provision which is plain and unambiguous. A statutes is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent”.

28. It is well settled that in the matter of grant of set off or exemption, the relevant provisions are required to be construed strictly. No liberal interpretation is permissible in such matters. On going through the explanation attached to Rule 53(6(b) of MVAT Rules, it clearly appears that receipts for the purpose of said rules means the receipts pertaining to all the activities including business activities of the dealer carried out in the State. The contention of Learned Advocate Smt. Badheka that only the activities of UTI GETF should be taken into consideration for the purposes of grant of set off u/r. 53(6)(b) is thus devoid of merit and cannot be accepted.”

Conclusion
Thus the interpretation lays down that the gross receipts should be computed considering receipts from all activities in Maharashtra. It will include receipts from sale of goods as well as non sale activities also. Further, Mutual fund is considered as one entity and cannot be considered scheme wise.

The ratio laid down above will also apply to other dealers. The dealers in Maharashtra are required to consider the above interpretation while computing the setoff.

shailesh.kwebmaker

Disallowance of set off vis-à-vis natural justice

Introduction
Availability of set off (input tax credit) is the backbone of the Value Added Tax (VAT ) system. A dealer is entitled to claim set off of the tax paid by him to his vendors on all such purchases which are categorised as inputs. The system works in a manner whereby there is no undue burden on the dealer. The amount of VAT payable by a dealer is the difference between the tax payable on sale price less the tax already paid on purchases (inputs). Thus, the tax paid on purchases gets set-off against the tax payable on sale. Denial of set off may cause many problems and the system of VAT will not be workable. A dealer, while selling goods, works out the sale price on the basis of the cost of goods sold. As the tax paid on purchases (inputs) are available as setoff, the same are normally not considered in the cost. But, if the set off is not allowed for any reason, the vendor will be at great risk. This will cause economic loss to vendor with added burden for interest and penalty.

Set off is subject to conditions and not absolute right
It is now well settled that availability of set off is subject to provisions under the Act. In other words, when to give set off, how to give set off and with what reductions etc. is as per the provisions made by the respective State Governments. The dealer cannot ask for the same as a right. The above position is well settled by number of judgments and under MVAT Act, the well known judgment is in case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur vs. The State of Maharashtra & Ors. (51 VST 1)(Bom). In this case, the Hon. High Court observed that set off is not a constitutional right but a statutory right, hence it can be subject to conditions as may be prescribed.

Vital condition under MVAT Act
There are various conditions for grant of set off in the MVAT Rules. However, one very important condition is in section 48(5), which provides that the set off will be allowable if the government has received money on the same goods in the government treasury. In other words, if the vendor has paid tax on the same goods, which are purchased by the buyer, then the buying dealer is entitled to get set off. If the vendor has defaulted, then set off can be denied to the buyer. Although this is such a condition which is beyond the control of the buyer, but still it is held valid in the judgment of Mahalaxmi Cotton Ginning Pressing and Oil Industries (supra).

New Concept of Hawala/R. C. Cancellation
In addition to disallowance of set off on the ground of non-payment by vendors, the sales tax authorities in Maharashtra have found one new way of disallowing set off. Under this new method, the setoff can be denied even without assessing the vendors. The Sales Tax Department of Maharashtra has published on its own website a list of ‘suspicious dealers’ (called hawala vendors) and also a list of dealers whose Registration certificates (R.C.) have been cancelled. The assessing authorities are indiscriminately disallowing set off on all the purchases from such listed vendors.

Principles of Natural justice not followed
Under the guise of hawala vendors and R.C. cancellation, the principles of natural justices are also kept aside by the learned assessing authorities. It is said that the names of hawala dealers or retrospective cancellation of R.C. of the vendors is based on certain materials collected from such vendors and on the basis of their statements under oath or their affidavits, etc. However, these materials used for considering the vendors as defaulters as well as hawala vendors is not delivered to the concerned buyers in whose case the set off is being disallowed. Further, no cross examination opportunity is granted. Therefore, amongst others, such disallowance is against the principles of natural justice and cannot be upheld in the eyes of law.

Right of cross examination is a crystallised right
There are a number of judgments laying down the principle that when the authorities use outside material, delivery of copies of the same and cross examination of the author of such material is required to be given to the concerned opposite party. Amongst others, reference can be made to the judgment of the Madras High Court in the case of Tilagarathinam Match Works vs. Commissioner of Central Excise, Tirunelveli (295 ELT 195) (Mad.)

In this case, the Hon. High Court has held that such a cross examination opportunity is required to be given even without the same being asked for by the opposite party. Thus, this is a very settled principle of natural justice and flouting of the same will render the order invalid. However, in case of hawala and R.C. cancellation cases, the authorities in Maharashtra are having a view that what is declared on their website is the final word and no such opportunity is required to be given.

With due respect, it is submitted that this is a wrong notion.

Shree Bhairav Metal Corporation vs. State of Gujarat (Special Civil Application No. 2149 of 2015 dated 26.3.2015)(Guj. H.C.)

Now the position is also clear in respect of hawala and R.C. cancellation. In the above case before Hon. Gujarat High Court, the facts as considered by the Hon. High Court are narrated as under:

“It appears that while claiming the aforesaid ITC, the petitioner dealer showed purchases of Rs.48,12,825 alleged to have been purchased from one M/s Lucky Enterprises. The petitioner also produced the bills with respect to purchase of goods alleged to have been purchased from M/s Lucky Enterprises. Thus, the assessee dealer claimed Rs.1,92,513 out of total ITC claimed of Rs.6,49,561/- on the purchases alleged to have been made from M/s Lucky Enterprises. That the Assessing Officer passed assessment order dated 30.12.2010 allowing the ITC as claimed by the petitioner dealer including the purchases made by the petitioner alleged to have been purchased from M/s Lucky Enterprises.

It appears that the registration certificate of M/s Lucky Enterprises came to be cancelled ab initio from 22.2.2006 on the ground that M/s Lucky Enterprises is not a genuine dealer and had indulged into billing activities only and all the transactions made by M/s Lucky Enterprises were found to be bogus and non-genuine.”

Thus the set off was disallowed on the ground of hawala and R. C. cancellation. However, the copy of the R.C. cancellation was not delivered to the appellant. Noting the above facts, the Hon. High Court has remanded the matter back while observing as under:

“9.4 As observed earlier, the impugned order has been passed by the adjudicating authority denying the ITC claimed by the petitioner on the alleged purchases made by the petitioner from M/s Lucky Enterprises on the ground that the registration certificate of M/s Lucky Enterprises– seller has been cancelled ab initio on the ground that the seller had involved into the billing activities only and all the transactions by M/s Lucky Enterprises are held to be bogus. The petitioner has been denied the ITC on the ground of the aforesaid activities/alleged transactions between the petitioner and M/s Lucky Enterprises. However, as observed herein above, the petitioner was not served with the copy of the order in the case of M/s Lucky Enterprises. Now, the copy of the order passed in the case of M/s Lucky Enterprises is available with the petitioner. Therefore, after giving an opportunity to the petitioner with respect to observations made in the case of M/s Lucky Enterprises insofar as the alleged transactions between the petitioner and M/s Lucky Enterprises and after giving an opportunity to the petitioner to prove the genuineness of the transaction between them and M/s Lucky Enterprises in light of the observations made herein above, therefore, the matter is required to be remanded to the adjudicating authority to consider the claim of the petitioner for ITC on the alleged purchases made by the petitioner from M/s Lucky Enterprises.”

Thus, the Hon. High Court has reiterated the principles of natural justice and remanded the matter for allowing opportunity to buyer to substantiate its claim after delivery of copies of adverse order. The truth can be established only upon such exercise.

Conclusion

Under MVAT Act also, wherever the set off is disallowed on the basis of default of vendor including hawala allegation and R.C. cancellation, the above principle is required to be followed. Therefore, the assessments made today without following such principle cannot be said to be valid in the eyes of law.

shailesh.kwebmaker

Rectification vis-à-vis Recall of the order

Introduction
Under fiscal laws, assessment proceedings are final, subject to an appeal, revision or rectification. In other words, normally the fiscal enactments provide for rectification as one of the remedial measures, after the order is passed.

Under Bombay Sales Tax Act (BST Act) also, there was a provision for rectification by way of section 62 of the BST Act. As usual, the section provided for correction of mistakes which are apparent from record. In almost all fiscal enactments the provisions are similar, i.e. mistakes apparent from record are rectifiable.

Scope of Mistake apparent on record
The real controversy starts as to whether mistake can be said to be apparent from record. If the mistake is categorized as apparent on record, only then it will be rectifiable. There are number of judicial pronouncements under both, direct and indirect taxes, deliberating upon the scope of rectification.

Recent judgment of the Hon. Bombay High Court
Recently, the Hon. Bombay High Court had an occasion to decide such an issue. Reference is to the judgment in case of D. S. Solanki vs. The Maharashtra Sales Tax Tribunal & Ors. (W. P. No. 2779 of 2014 dt.28.4.2015). The facts in the above case, as noted by the Hon. Bombay High Court, are as under:

“3. In the present case, we are concerned with the assessment for the years 1993-94, 1994-95 and 1995-96. It is the contention of the petitioner that in the year 1999, the Revenue Authorities had initiated reassessment proceedings in respect of resale claim in respect of purchases from the vendors of the petitioner. Vide order dated 30.3.1999, re-sale claim allowed in respect of purchases from vendors was disallowed.

Similarly, vide orders dated 31.3.1999 and 29.11.1999, re-sale claim in respect of the assessment period 1994- 95 and 1995-96 was also disallowed.

Being aggrieved by the said orders, three appeals were preferred. Vide order dated 9.3.2001, the Appellate Authority dismissed the appeals and confirmed the orders passed by the first Appellate Authority. Being aggrieved thereby, three appeals were preferred before the learned Appellate Tribunal. The learned Tribunal vide order dated 29.1.2005, allowed the appeals and set aside the order passed by the Original Authority as well as the first Appellate Authority. The Revenue thereafter preferred the rectification applications, as aforesaid, which were allowed by the impugned order. Being aggrieved by the order, the present petition was filed”.

By allowing the rectification, the Tribunal recalled the original orders for fresh hearing.

Based on the zabove facts and the contentions of the parties, the Hon. Bombay High Court made observations about scope of rectification citing the judgment of the Hon. Supreme Court. The said observations are as under:

“6. Their Lordships of the Apex Court in the case of Deva Metal Powders Pvt. Ltd. (10 VST 751) (SC) (cited supra) had an occasion to consider a pari material provisions in U.P. Trade Tax Act. The Apex Court while considering the said provisions has observed thus :-

“This Court in M/s. Thungabhadra Industries Ltd. (in all the Appeals) vs. The Government of Andhra Pradesh represented by the Deputy Commissioner of Commercial Taxes, Anantapur, [AIR 1964 SC 1372] held as follows:

“There is a distinction which is real, though it might not always be capable of exposition, between a mere erroneous decision and a decision which could be characterized as vitiated by” error apparent”. A review is by no means an appeal in disguise whereby an erroneous decision is reheard and corrected, but lies only for patent error.

Where without any elaborate argument one could point to the error and say here is a substantial point of law which states one in the face and there could reasonably be no two opinions entertained about it, a clear case of error apparent on the face of the record would be made out.”

An error apparent on the face of the record for acquiring jurisdiction to effect rectification must be such an error which may strike one on a mere looking at the record and would not require any long drawn process of reasoning. The following observations in connection with an error apparent on the face of the record in the case of Satyanarayan Laxminarayan Hegde v. Mallikarjun Bhavanappa Tiruymale [ AIR 1960 SC 137] need to be noted:

“An error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions can hardly be said to be an error apparent on the face of the record. Where an alleged error is far from self-evident and if it can be established, it has to be established, by lengthy and complicated arguments, such an error cannot be cured by a writ of certiorari according to the rule governing the powers of the superior Court to issue such a writ.”

“A bare look at Section 22 of the Act makes it clear that a mistake apparent from the record is rectifiable. In order to attract the application of Section 22, the mistake must exist and the same must be apparent from the record. The power to rectify the mistake, however, does not cover cases where a revision or review of the order is intended. “Mistake” means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error, a fault, a misunderstanding, a misconception. “Apparent” means visible; capable of being seen, obvious; plain. It means “open to view, visible, evident, appears, appearing as real and true, conspicuous, manifest, obvious, seeming.” A mistake which can be rectified under Section 22 is one which is patent, which is obvious and whose discovery is not dependent on argument or elaboration. In our view rectification of an order does not mean obliteration of the order originally passed and its substitution by a new order.

What the Revenue intends to do in the present case is precisely the substitution of the order which according to us is not permissible under the provisions of Section 22 and, therefore, the High Court was not justified in holding that there was mistake apparent on the face of the record. In order to bring an application under Section 22, the mistake must be “apparent” from the record. Section 22 does not enable an order to be reversed by revision or by review, but permits only some error which is apparent on the face of the record to be corrected. Where an error is far from self-evident, it ceases to be an apparent error. It is, no doubt, true that a mistake capable of being rectified under Section 22 is not confined to clerical or arithmetical mistake. On the other hand, it does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof. As observed by this Court in Master Construction Co. (P) Ltd. v. State of Orissa [1966] 17 STC 360, an error which is apparent from record should be one which is not an error which depends for its discovery on elaborate arguments on questions of fact or law.

“Mistake” is an ordinary word but in taxation laws, it has a special significance. It is not an arithmetical error which, after a judicious probe into the record from which it is supposed to emanate is discerned. The word “mistake” is inherently indefinite in scope, as to what may be a mistake for one may not be one for another. It is mostly subjective and the dividing line in border areas is thin and indiscernible. It is something which a duly and judiciously instructed mind can find out from the record. In order to attract the power to rectify under Section 22, it is not sufficient if there is merely a mistake in the order sought to be rectified. The mistake to be rectified must be one apparent from the record. A decision on a debatable point of law or a disputed question of fact is not a mistake apparent from the record. The plain meaning of the word “apparent” is that it must be something which appears to be so ex facie and it is incapable of argument or debate. It, therefore, follows that a decision on a debatable point of law or fact or failure to apply the law to a set of facts which remains to be investigated cannot be corrected by way of rectifications.”

“In the said case, initially, the assessee was assessed for the aluminum powder treating the same as a metal and as such holding him liable to pay tax at 2.2 %. In the rectification proceedings, it was held that the relevant entry would not include aluminum powder and as such the same was assessed treating the same to be an unclassified item. In this background, the aforesaid observation is made by the Apex Court. It has been held by the Hon’ble Apex Court that in order to attract the provisions of the Act, the mistake must exist and the same must be apparent from the record. It has been held that “Mistake” “means to take or understand wrongly or inaccurately; to make an error in interpreting; it is an error, a fault, a misunderstanding, a misconception; to make an error in interpreting. It has been further held that a mistake which can be rectified u/s. 22 is one which is patent, obvious and whose discovery is not dependent on argument or elaboration. However, the Apex Court itself has held that the power u/s. 22 of the said Act is not confined to clerical or arithmetical mistake. It is further held that it does not cover any mistake which may be discovered by a complicated process of investigation, argument or proof. The Apex Court thus held that there cannot be hard and fast rule as to whether mistake is apparent or not and the same would be mostly subjective and the dividing line in border areas is thin and indiscernible. It has been further held that a decision on debatable point of law or fact or failure to apply the law to a set of facts which remain to be investigated, cannot be corrected by way of rectifications.”

After analysing the scope of rectification as above, the Hon. Bombay High Court in the case of the Petitioner observed as under :

“8. It would thus be seen that the learned Tribunal while deciding the Second Appeal proceeds on a footing that the assessment in question was made u/s. 33(3) of the said Act. However, the assessments were made in fact u/s. 33(2) of the said Act. It could further be seen that even the lawyer who was representing the petitioner before the learned Tribunal in the rectification application, himself admitted that the original assessments were made u/s. 33(2) and not u/s. 33(3) of the said Act. The learned counsel further admitted that the period for 1995-96 does not involve reassessment and the said matter had arisen from the assessment itself. The learned counsel fairly stated that the inaccuracies have crept in the order passed by the learned Tribunal, since the inaccuracies are in the first appeal itself. It could thus be seen that in the facts of the present case, though the assessments were made u/s. 33(2) and not u/s. 33(3), the Second Appeals were decided on an assumption that the assessments were done u/s. 33(3). It can thus be seen that the error which has been committed is on an erroneous assumption of fact. It is further to be noted that it is not even disputed by any of the parties that the error committed by the learned Tribunal is on an erroneous assumption of fact. These errors are such which can be seen with a naked eye. The errors are not of such a nature which would require detailed arguments to be advanced or a complicated process of investigation to be gone into, so as to unearth them. Any person with some understanding of law, can easily make out these errors. Not only that, but the learned counsel appearing on behalf of the assesesee in the rectification proceedings has also admitted that these errors have occurred in the order of which rectification is sought. In that view of the matter, we find that it cannot be said that the jurisdiction exercised by the learned Tribunal was exercised beyond the scope available to it u/s. 62.”

Thus, the Hon. High Court has confirmed that the mistakes which are of fact and the judgment is based on such mistaken facts then the judgment can be recalled for fresh decision.

Conclusion

There are a number of judgments about the above issue. Each case depends upon its own facts. However, the guidelines available are that if the issue is debatable, then rectification will not be permissible. If the mistake is clear as seen, then the rectification is possible and the effect can be either to modify the order or even recall the same.

shailesh.kwebmaker

Free supply vis-a-vis Sale and Sale Price

Under the Sales Tax Law, transaction of sale can be taxed as per sale price of that transaction.

A ‘sale’ can take place if the transaction fulfills certain criteria. The term ‘sale’ is defined in Sales Tax Laws and it has also been defined in (MVAT Act,2002). The said definition is given in section 2(24) of MVAT Act,2002 and it is reproduced below for ready reference.

“(24) “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration hut 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;…”

The transaction, to be ‘sale’, should be for consideration.

The above term ‘sale’ has also been subject matter of interpretation by various courts. A reference can be made to the landmark judgment in case of Gannon Dunkerly and Co.(9 STC 353)(SC). In this judgment about ‘sale’, it is observed as under:

From the above passage, it is clear that to be a ‘sale’ following criteria should be fulfilled.

Thus, to consider the transaction as ‘sale’, consideration in money terms is necessary. Without consideration, no sale can take place.

In number of cases, the customer i.e. buyer may supply certain goods to its vendor which are to be incorporated in the finished goods to be supplied by vendor to the said buyer. Similarly there may be cases, where contractee may be supplying some goods to be used in contract to be executed for it by contractor appointed by it. Both above issues are common and the tax position of same can be analysed as under:

The supply of such goods by buyer to the vendor will be free supply, as it is to be incorporated in goods to be supplied to it. It is also possible that for the purpose of Excise etc. the vendor may be required to include value of such goods in its sale price and after calculating Excise on such total value, the value of free supply by buyer will be deducted again and in fact the net amount is only charged to the buyer.

The issue arises whether such value of free supply is part of sale price of vendor for which it will be required to discharge sales tax on the same.

There is a be possibility of considering above value as sale price, if, first there is sale by buyer of said goods to the vendor and thereafter vendor again selling the said goods along with its finished goods to the buyer. Therefore, it will be required to be seen whether there is sale by buyer of the free supply made by it to the vendor.

There are instances where supply made by customer to supplier has been considered as sale and accordingly liable to tax in the hands of customer as well as supplier. Reference can be made to the judgment of Supreme Court in case of M/s. N. M. Goel (72 STC 368)(SC). In this case, the facts were that the contractee has given certain materials to contractor for use in the contract executed for the said contractee. As per terms in contract the goods to be supplied were to be valued as per the prices mentioned in the contract. It is under the above circumstances, the Supreme Court held that the transaction of supply of goods by contractee fulfills the requirements of a transaction being ‘sale’. There are two parties i.e. contractee and contractor, supply of moveable goods and consideration. The Supreme Court also held that when the possession of the goods is given to the contractor there is transfer of property and hence, the sale transaction from contractee to contractor gets complete. The Supreme Court further held that when contractor uses these goods in the contract for contractee, there is again fresh transfer of property from contractor to contractee and hence one more sale transaction from contractor to contractee. In fact, the Supreme Court has noted facts of case as under.

“The appellant, a dealer registered under the Madhya Pradesh General Sales Tax Act, 1958, made an item rate tender to the PWD for construction of food grain godowns and ancillary buildings. In that tender, prices of the materials used for the construction including cost of iron, steel and cement were included. The PWD had, however, agreed to supply from its stores the iron, steel and cement and to deduct the prices of the materials so supplied and consumed in the construction, from the final bill of the appellant. Clause (10) of the contract provided: “. . . . . if it is required that the contractor shall use certain stores to be provided by the Engineer-in-Charge as shown in the Schedule of materials hereto annexed, the contractor shall be bound to procure and shall be supplied such material and stores as are from time to time required to be used by him for the purposes of the contract only, and the value of the full quantity of materials and stores supplied at the rates specified in the said Schedule of materials may be set-off or deducted from any sums then due or thereafter to become due to the contractor under the contract or otherwise, or against or from the security deposit, or the proceeds or sale thereof if the same is held in Government securities, the same or a sufficient portion thereof being in this case sold for the purpose. All the materials so supplied to the contractor shall remain the absolute property of the Government and shall not be removed on any account from the site of the work, and shall be at all times open to inspection by the Engineer-in- Charge.” For the construction, the appellant was supplied iron, steel and cement by the PWD and the appellant purchased other materials from the market. The prices of iron, steel and cement supplied to the appellant for the work were deducted from its final bill. The Sales Tax Officer assessed the appellant to entry tax for iron, steel and cement u/s. 6(c) of the Madhya Pradesh Sthaniya Kshetra Me Mal Ke Pravesh Par Kar Adhiniyam, 1976, on the ground that their entry had been effected by the PWD, which was not a registered dealer, at the instance of the appellant, because the appellant had ultimately used the materials for the construction work; and the Deputy Commissioner affirmed the assessments on revision. A writ petition filed by the appellant challenging the assessments to entry tax was dismissed by the High Court. On appeal to the Supreme Court:

Based on the above, the Supreme Court has held as under:

“On these set of facts, while dismissing the appeal, (i) that since the PWD was not a registered dealer the presumption u/s. 6(c) applied, that the entry of the goods had been effected by the appellant into the local area before they were purchased by the appellant; that in order to attract entry tax not only the property in the goods had to pass from the PWD to the appellant but there had to be an independent contract-separate and distinct-apart from the mere passing of the property: mere passing of property from the PWD to the appellant would not suffice; that, in this case, for the performance of the contract, the appellant was bound to procure the materials; but in order to ensure that quality materials were procured, the PWD undertook to supply such materials and stores as from time to time were required by the appellant to be used for the purpose of performing the contract only. The value of such quantity of materials and stores so supplied was specified at a rate and got set-off or deducted from any sum due or to become due thereafter to the appellant. Clause (10) of the contract read in proper light indicated that a sale inhered from the transaction. By the use or consumption of materials in the work of construction, there was passing of the property in the goods to the appellant from the PWD. By appropriation and by the agreement, there was a sale from the PWD to the appellant as envisaged in terms of clause (10); and that, therefore, the appellant was liable to pay entry tax on the materials supplied by the PWD.”

Based on above judgment of Supreme Court there are number of other judgments where the supply of goods by contractee to contractor has been held as ‘sale’, if such supply is against pre agreed price. In such cases, normally the contractor bills for gross value and gives deduction for the material value as arrived at as per the prices agreed and claims net amount from the contractee. Thus, if such is the mode of billing by the contractor it gives sufficient indication that the supply by the contractee is as per agreed price and hence will be considered to be ‘sale’. In such cases, even if, the supply is referred to as free supply, it will be a misnomer and in reality it will be a ‘sale’ from contractee to contractor and again from contractor to contractee.

However, if there is no such situation i.e. no prices are given for the materials supplied by contractee/buyer as well as no deduction for any value for same is made in the bills of contractor, then there is no sale/purchase of such materials. This position is also clear from judgment of the Hon. Tribunal in case of CIDCO Ltd. (M.A. No.122 of 2005 in S.A. no. 1707 of 1999 DT.6.10.2007).

In this case, the appellant has purchased cement from other state and given free to contractor. In assessment, tax was levied but in first appeal the same was deleted. When the appellant was in second appeal, the Department filed Misc. Application for levy of the tax on cement. The Hon. Tribunal held that when the supply is free of cost there is no question of levy and the Misc. Appl. was rejected. This covers up the legal position. The net result is that if in the contract there are no terms giving price to the goods to be supplied to contractor, and accordingly the same is also not considered in the bills prepared by the contractor, there is no question of any sale transaction involved in such supply. In other words, there is no question of attraction of any tax under Sales Tax Laws on such free supply on either side.

The other situation is consideration of value of such supply for Excise purpose.

For purpose of paying Excise duty the vendor may consider the value of goods supplied by buyer and may be mentioned on the invoice also.

However mentioning the value of goods for payment of Excise duty cannot amount to sale/purchase and cannot bring it in fold of sale price/purchase price.

This position is clear from judgment of the Hon. Tribunal in case of Ghadge Patil Ind. Ltd. & others (S. A. 320 to 327 of 2002 dt.30.3.2007). The short gist of judgment is as under:

The facts of the case relating to year 1994-95 and others are that 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 creditor particular price to be considered for the said free issues. In its sale bill appellant added the cost of such free issues in his price to calculate excise duty. The cost so added was then given deduction. On above facts 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 part of buyer or seller to sale/ purchase above goods nor agreed for any consideration. Therefore, there cannot be sale from appellant to 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 case of N. M. Goyal (72 STC 368) on above facts. The Tribunal made reference to judgment in case of Gannon Dunkerley & Co. (9 STC 353), Indian Coffee & Tea Distributors Co. (6 STC 47), Indian Alluminium Cables (115 STC 161), Hindustan Aeronautical Ltd. (55 STC 314) and Auto Comp Corpn. (S.A.1083 of 99 dt.26.9.2003). The Tribunal directed to delete the addition.

Thus, it is held that for considering the free supply value as sale/purchase there should be conscious decision on the same which can be ascertained from the fact of giving prices for such supply and billing mode by supplier. Simply mentioning value for Excise duty calculation cannot make it sale/purchase, and cannot be part of price of transaction, nor can it be included in sale price.

Conclusion

Whether free supply by buyer/contractee to the vendor/ contractor will amount to sale/purchase depends upon intention of the parties coupled with underlying documents. To make the intention clear, in documents it should be specifically mentioned that the supply is free to the vendor but the value may be considered for excise payment. If the documents are not clear, then the dispute may arise and the sales tax department will certainly try to claim tax on the same.

shailesh.kwebmaker

Software – sale vis-a-vis service

Introduction
The menace of double taxation (i.e. VAT and Service Tax both on the same transaction) is increasing day by day. Both the authorities are trying to extract maximum out of the confused and unsettled legal position about attraction of VAT and Service Tax on certain type of transactions.

In relation to software, we come across sale/purchase transactions wherein both Service Tax and VAT are being levied. This is on account of uncertainty of legal position. There are different judgments from various Tribunals and High Courts.

Copyright in software
In relation to software, the sale/purchase transactions can take place on the premises that there is sale/purchase of copyright in the concerned software. However, whether there is sale/purchase of copyright either outright or by way of transfer of right to use goods is to be decided on the facts of each case. There can be certain guidelines based on decided cases.

Reference can be made to the judgment of the Hon’ble Karnataka High Court in the case of Sasken Communication Technologies Ltd. (55 VST 89) Karnataka.

In this judgment, it was observed that if the copyright is in regard to software developed for customer, firstly it belongs to the developer and thereafter if transferred to the customer for a consideration then it will be sale of software. There can be another situation, where the software is developed, wherein copyright from the inception belongs to the customer. In such circumstances, the software so developed belongs to customer only. The developer in such a case is rendering services. In such a situation, VAT is not applicable. Relevant observations of the High Court can be noted as under;

“39. From the aforesaid Clauses it is abundantly clear that the parties have entered into an agreement whereby the assessee renders service to the client for development of software, i.e. for software development and other services. Pursuant to the agreement and the work orders, the service shall be performed by the assessee. Services must be requested by issue of a valid work order together with a statement of work. As compensation for the service rendered to the customer, the fees specified in the relevant work order or in the statement of work is payable and billing is done on a time and material basis or on a fixed price on a monthly basis. Pricing for time and material projects shall be fixed at a rate set forth in Annexure-A to the agreement.

40. The assessee agrees, that all patentable and unpatentable, inventions, discoveries and ideas which are made or conceived as a direct or indirect result of the programming or other services performed under the agreement shall be considered as works made for hire and shall remain exclusive property of the client and the assessee shall have no ownership interest therein. Promptly, upon conception of such an invention, discovery, or idea the assessee agrees to disclose the same to the client and the client shall have full power and authority to file patent applications thereon and maintain patents thereon. At the request of the client the assessee agrees to execute the documents including but not limited to copyright assignment documents, take all rightful oaths and to perform such acts as may be deemed necessary or advisable to confirm on the client all right, title and interest in and to such inventions, discoveries or ideas, and all patent applications, patents, and copyrights thereon. Both the source code of developed software and hardware projects of worldwide Intellectual Property in and each shall be owned by the client. The assessee acknowledges that all deliverables shall be considered as works made for hire and the client will have all right, title including worldwide ownership of Intellectual Property Rights in and each deliverable and all copies made from it. If acceptable to the client, the client may reuse all or any of the components developed by the assessee outside the scope of those contracts for the execution of the projects under this agreement.

41. Therefore, even before rendering service, the assessee has given up his rights to the software to be developed by the assessee. The considerations under the agreement is not for the cost of the project, the consideration is for the service rendered, based on time or man hours. Once the project is developed, all rights in respect of the said project including the Intellectual Property Rights vest with the customer and he is at liberty to deal with it in any manner he likes. The assessee has agreed to execute all such documents which are required for the exercise of such absolute rights over the software developed by the assessee.

42. The ‘deliverables’ has been defined under the agreement to mean all materials in whatever form generated, treated or resulting from the development including but not related to the software modules or any part thereof, the source code and or object code, enhancement applications as well as any other materials media and documentation which shall be prepared, written and or developed by the developer for the client under this agreement and/or Project Order. If the customer agrees to provide any hardware, software and other deliverables that may be required to carry out the development and provide the deliverables he may do so. Otherwise the assessee has to make or provide all those hardware and software to develop the deliverable and the final product. No doubt at the end of the day, this software which is developed is embedded on the material object and only then the customer can make use of the same. The software so developed even before it is embedded on the material object or after it is embedded on a material object exclusively belongs to the customer. In the entire contract there is nothing to indicate that the assessee after developing the software has to embed the same on a material object and then deliver the same to the customer so as to have title to the project which is developed. The title to the project/software to be developed lies with the customer even before the assessee starts rendering service.”

Uncertainty prevails
In spite of the above judgments, the disputes are still arising about attraction of both the taxes. Recently, there was a controversy before the Hon’ble Karnataka High Court, where three separate transactions about software were involved. The reference is to the latest judgment of the Hon’ble Karnataka High Court in case of Infosys Ltd. (Writ Petition no. 57023-57070/2013 dated 9.2.2015.

The facts in this case are that the appellant M/s Infosys was having 3 separate transactions. One for sale of ready software like “Finacle”, another transaction was that it could be customised as per requirement of the customer. Both these transactions were considered as sale and VAT on the same was charged.

The third transaction was about implementation of the software supplied to the customer. Appellant was contending that this is a separate transaction for only rendering services and cannot be made liable to VAT . However, the sales tax authorities considered such implementation part also as part of the total transaction of supply and customisation. So, VAT was levied on the full implementation charges also.

High Court’s observations
So far as implementation part is concerned, the Hon’ble High Court did not agree with the understanding of the authorities. The relevant observations of the Hon’ble High Court are as under;
“52. The understanding of the authorities is that the assessee has developed a software viz., ‘Finacle software’ which is a basic software relating to banking activities and is the copyright holder for the same. Whenever customer namely a bank approaches the assessee to develop software for their business activities, the assessee will take steps to develop the said software as per the requirement of the customers. In this activity, the assessee will make changes to the Finacle software held by it by customising the same to the requirement of the customers and will deliver the improved/modified version of the Finacle software to them. Here, what is transferred is the software with all modifications as per the request and the proposal made by the customers. This implementation process is nothing but value addition to the Finacle software, but the dealer while declaring the turnover, splits the said transaction into two parts namely, sale part and service part. This act of the dealer in splitting the contract as one for sale and the other for implementation of finacle software, thereby claiming exemption on the latter part is not correct because in almost all the instances, what is supplied by the assessee to the customers is the software as per the requirements and the amount received towards the whole process of customisation has to be considered as the amount received for the supply of customised Finacle software.

53. From the aforesaid findings, it is clear that the Assessing Authority is of the view that the customisation is equivalent to implementation. During customisation when scripting or code writing is done in order to make the standard or package software useful to the client, the consideration paid for customisation constitutes the consideration for transfer of goods. The said aspect is not disputed by the assessee.

54. What the assessee contends is that the assessee has the packaged software ‘Finacle’ a banking solution. If the said software cannot be used as such by the banks, then they make known their requirements to be incorporated in the said packaged software either by way of modifications, additions and so as to make it customer specific, which is called as customisation. What is sold by the assessee to the bank is the customised software and not the packaged software. It is clear from the invoice that for the consideration received for this customised software, the assessee has paid VAT because the assessee has copyright not only in the packaged software but also in the customised software and what is transferred to the bank is only the right to use the said software which is a deemed sale. After this customised software is installed in the premises of the bank, before bank starts using it, the process of integration with other systems has to be carried out. It is for that purpose a separate contract called service contract is entered into. The terms of the said contract as set out above involves only rendering service and rendering training to the employees of the bank, so that the installed software starts functioning. The terms of the agreement makes it clear that it is not obligatory for the bank/customer to have the services rendered only by the assessee as a part of contract of sale or a condition of sale. It is open to the customers to have the services rendered by any other competent agency. Therefore, the Assessing Authority has misconstrued this implementation to that of customisation of the software and erred in holding that the customisation involves transfer of goods and the assessee cannot avoid payment of VAT by describing the same as implementation.”

Thus, the Hon’ble High Court has appreciated that the transactions were independent. Further, where there is no transfer of copy right and only services are involved, no VAT can be levied.

Conclusion

The issue about dual taxation of VAT and Service Tax is a burning issue. The customers are suffering due to double levy by the vendors. The clarity of law is therefore very much required. We hope that with the help of above judgments both the concepts i.e. about independent nature of transactions and nature of transactions involving sale/purchase of software will become clear. Therefore, there will be some certainty and correct tax will be levied. We hope that authorities from both the departments will follow the judgment in the spirit of Law so as to overcome the problem of double taxation.

shailesh.kwebmaker

VAT on Service Tax collected separately

Under MVAT Act, 2002, the tax is payable on ‘sale price’. The term ‘sale price’ is defined in section 2(25) of the MVAT Act, 2002 as under;

“(25) “sale price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged.

Explanation I — The amount of duties levied or leviable on goods under the Central Excise Act, 1944 (1 of 1944) or the Customs Act, 1962 (52 of 1962) or the Bombay Prohibition Act, 1949 (Bom. 25 of 1949), shall be deemed to be part of the sale price of such goods, whether such duties are paid or payable by or on behalf of, the seller or the purchaser or any other person. Explanation IA: Sale price shall not include the amount of service tax levied or leviable under the Finance Act, 1994 and collected separately from the purchaser. (w.e.f.1.4.2015),

Explanation II — Sale price shall not include tax paid or payable to a 16[seller] in respect of such sale.

Explanation III — Sale price shall include the amount received by the seller by way of deposit, whether refundable or not, which has been received whether by way of a separate agreement or not, in connection with or incidental or ancillary to, the said sale of goods;

Thus, the amount received from the buyer is considered as sale price. In addition, the statutory levies like Excise etc. are also deemed to be part of sale price .

What is the amount received from buyer? It has numerous interpretations. In the present controversy, the issue is about Service Tax collected separately, wherever, it is applicable. For example, in case of works contract, there is composite contract for supply of goods and services. Under such circumstances, the dealer may be liable to pay VAT on the supply part and Service Tax on labour portion. On the applicable labour portion, the dealer may collect Service Tax as inclusive in price i.e. without showing Service Tax separately or, on other hand, the dealer may charge Service Tax separately in the invoice.

In case, Service Tax is charged as inclusive (subject to facts of each case) it can be said that there is not much debate about ‘sale price’ and the whole amount of sale price without exclusion of Service Tax will be considered as sale price for levy of VAT .

However, the controversy arises when the Service Tax is collected separately in the invoices.

A possible argument is that the Service Tax is a tax allowed or to be collected from the customers under the provisions of Service Tax and hence it is an amount collected for and on behalf and to be paid to the Central Government. Therefore, it can be argued that it does not form part of the money of the dealer, it is a separate collection.

Recent judgment and amendment

In fact, in case of Sujata Printers (VAT A.No.18 of 2013 dt. 9.3.2015), Hon’ble MSST (Maharashtra Tribunal) has already held that the Service Tax collected separately does not form part of sale price. Further, there is amendment dated 18.4.2015 in the definition of ‘sale price’ by which Service Tax collected separately is excluded from the amount of sale price, shown above by Explanation 1A.

After above judgment and above referred amendment, there is circular from the Commissioner of Sales Tax, bearing no. 6T of 2015 dated 14.5.2015 in which the implications of above judgment and amendment are explained. It is stated in the Circular that the judgment will remain operative from 1.4.2005 till 31.3.2015. From 1.4.2015 the situation will be covered by the amendment. The net effect is that on Service Tax collected separately, no VAT will be applicable.

Controversy regarding Service Tax in case of Composition Schemes

In the above circular, the learned Commissioner of Sales Tax has made distinction between the works contracts. The Commissioner of Sales Tax has stated that the above exclusion of Service Tax collected separately will apply in case where the liability on works contract or other transactions is discharged under regular method like, in case of works contract, if the liability is discharged under rule 58 of MVAT Rules. However, in relation to discharging of tax under composition schemes, it is specifically mentioned that the above exclusion will not apply. In other words, the circular interprets that in case the liability is discharged under composition scheme than even if Service Tax is collected separately, it will be considered as part of contract price and on such whole amount (including Service Tax), the composition will be payable. It appears that the Commissioner of Sales Tax has kept in mind that under composition schemes, the dealer has to forgo its legal claim and has to abide by the terms of the composition scheme. Therefore, the assessing authorities are levying VAT on Service Tax collected separately, where the contractors discharge their tax liability under works contract composition scheme.

Recent judgment of the Hon’ble Tribunal

However, now the legal position has become absolute clear. The issue has been resolved by the Hon’ble Tribunal vide its judgment in case of Technocraft Engineers (VAT SA No.237 of 2014 dt.3.11.2015). In this case, the issue was same. VAT was levied on the Service Tax collected separately on the works contract and the dealer was discharging liability under composition scheme. The Hon’ble Tribunal has referred to arguments from both the sides. There was also earlier judgment in the 0case of Nikhil Comforts (SA No.30 of 2010 dated 31.3.2012) in which a contrary view was taken.

However, in this judgment, the Hon’ble Tribunal has held that no VAT can be levied on Service Tax collected separately, even if the tax is discharged under composition scheme. The reasoning of learned Tribunal is noted as under; “(iii) In the impugned matter, assessment order for the year was passed on 26/12/2012, for the interior designing the appellant had received total amount of Rs.4,35,43,472/- on which 8% composition amount was charged and with interest u/s. 30(2) and 30(3) of the MVAT Act total demand was raised at Rs.27,10,949/- Appellant challenged the said order on the ground of incorrect determination of turnover, levy of tax on service tax and set-off claim and on interest. The First Appellate Authority confirmed the levy of tax on service tax amount saying that, it is part of contract price but he allowed other grounds. Hence, VAT payable amount is changed from Rs.27,10,949/- to Rs.2,24,831/- with part payment made in appeal, the appellant got refund of Rs.1,82,109/- on which no interest u/s. 52 of the MVAT Act was calculated. In total consideration, the service charges amount will become the part of total receipt by the Contractor but service tax amount on service charges will not become part of total receipt, because appellant contractor wants to pay the said amount to the Central Excise Department. Although, the definition of sale price is later on amended with effect from 01/04/2015, and the separate Explanation IA is added clarifying that, service tax levied and collected separately shall not be included in sale price. It is the revenue’s contention that, the said amendment is not retrospective, and it has effect from 01/04/2015. So, upto 31/03/2015 total receipt should be considered including service tax. However, we made it clear that, in the definition of sale price u/s. 2(25) service tax was not incorporated as deemed sale price. In the instant case, sale means a valuable consideration of the goods involved in the works contract, the consideration must be received by the contractor. Even though he had collected service tax separately he has to deposit it with the Central Government. Therefore, it will not become part of his receipt. The revenue had cited most of the case laws on agreement for composition.

Appellant is not denying that, he had not agreed for composition. He is ready to pay 8% tax on the valuable consideration received by him which he can utilise in his business, and the tax amount against service charges incurred by him, he cannot keep with him as consideration for receipt of works contract. In total contract receipt, the sale price of the goods, service charges shown etc. are includible. In Sub–clause (a) and (b) of sub–section (3) of section 42, the wording is used “equal to 5% , of total contract value of the works contract in case of construction contract and 8% of total contract value of work contract of any other case.” Here, the meaning of total contract value is to be determined appropriately. By way of allotment of any works if assesse is receiving some amount against the property transferred in the goods and against the labour charges utilised in the said work, it will become a contract value. The various taxes levied separately, and those are to be deposited with the Govt. authorities will not constitute the total receipt against the said contract value hence element of service tax will not be a part of sale prices before amendment also. One can understand total expenses required to be paid for any particular work in which amount of taxes are also to be in total turnover but when a turnover for levy of tax is to be taken into consideration, the element shown separately in sale invoice It may be against sales tax VAT tax and service tax which cannot be included.” Thus, the Hon’ble Tribunal has put to rest all controversy in this regard. Most of the dealers (contractors) have not collected VAT on Service Tax collected separately and hence the above judgment will be a big relief.

Conclusion

To avoid future litigation, it is expected that the department will bring out one more circular to accept the above judgment. The finality to the subject is important, so that dealers can predict their liability correctly and a controversy is avoided.

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Builders’ plight continues

Introduction Whether builders and developers are works contractors, under sales tax/VAT laws, has chequered history. In the late 1980s when works contract was introduced, there were determination orders passed by the learned Commissioner of Sales Tax, determining that builders were not liable to sales tax (works contract) when they were selling premises to prospective buyers. After the judgment of the Hon’ble Supreme Court in case of K. Raheja (141 STC 168), the Sales Tax Department of Maharashtra took a view that builders were also ‘works contractors’ and liable to tax accordingly. The above position was challenged by preferring writ petitions in the Hon’ble Bombay The High Court. Hon’ble Bombay High Court decided the issue vide judgment in MCHI (51 VST 168) and held that in certain circumstances the builders were also works contractors. This decision was challenged before the Hon’ble Supreme Court. The Supreme Court, along with other matters, decided that the above issue, vide its judgment in case of Larsen & Toubro and others (65 VST 1). In above judgment, the Hon’ble Larger Bench of the Supreme Court confirmed the judgment of the Hon’ble Bombay High Court that builders and developers were works contractors. However, while deciding the issues before it, the Hon’ble Supreme Court also observed that the contract starts from the date of agreement with the prospective buyer and the completed portion prior to the date of such agreement would amount to sale of immovable property, thus such portion could be subjected to sales tax/VAT. Supreme Court also advised for necessary changes in the provisions. ? Amendments made in Rules vide notification dtd. 29.01.2014 To comply with the directions of the Hon’ble Supreme Court in above judgment, Government of Maharashtra amended the rules particularly rule 58(1A) was amended, and, further rules 58(1B) and 58(1C) were inserted. The sum and substance of above amendments was that if the dealer (builder/ developer) claimed deduction for cost of land, it should be allowed as per ready reckoner rate of the concerned land and if higher deduction is claimed, it should be supported by determination of value of land by Department of Town Planning & Valuation. Similarly, for deduction towards constructed portion prior to date of agreement, the rules 58(1B) & (1C) provided a table about stages for deduction and also cast an obligation to support the construction of the said portion by certificate from Local or Planning Authority. For sake of brevity the above rules are not discussed elaborately here.

Fresh Writ Petition challenging the validity of the above rules

Confederation of Real Estates Developers’ Association of India – Maharashtra & others filed writ petition in the Bombay High Court. The said writ petitions are decided vide Writ Petition no. 4520 of 2014 & others dated 30.4.2015. The challenges were to the above rules. The challenges as recorded by the Hon’ble Bombay High Court are reproduced below: –

“5. Grounds of challenge are that the impugned notification and the trade circulars are in express conflict with the observations of the Supreme Court in the case of “Larsen and Toubro Limited vs. State of Karnataka and Another” (2014) 1 SCC 708 and other pronouncements of this High Court and the Supreme Court. It is being submitted that amended Rule 58 fails to arrive at true and correct value of goods at the time of incorporation in the works contract and tends to indirectly tax immovable property and along with goods. Though Rule 58 (1A) makes allowance for deduction of cost of land, it compels determination in accordance with guidelines appended to Annual Statement of Rates, prepared under the provisions of Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 (Hereinafter referred to as Bombay TMV Rules, 1995), as would be applicable on 1st January of calendar year in which agreement of sale is to be registered, and as such, profit relatable to transfer of land would not be deductible from the total contract value. The Amended Rule 58 (1A) of the MVAT Rules also does not give allowance to deductions on account of consideration for acquisition of FSI/TDR, payments towards eviction of tenants, clearance of encroachment on land. While Rule 58 (1) (h) permits deduction of profit relatable to supply of labour and service, amended rule does not provide for profit relatable to third element, namely, the land and the object of taxing of value of goods at the time of incorporation, as such, gets blurred. Trade Circular dated 21st February, 2014 restricts options to only one from the four methods given and no other option such as, ‘cost plus gross profit’ is admissible. Various other arguments have been advanced to contend that the Rule is deficient to provide for many things involved. Arguments are also advanced contending that Trade Circulars tend to be ambiguous and do not clarify many issues while they purport to answer the questions. According to the petitioners cost plus gross profit method is viable and practicable.

6. The petitioners further contend that Rule 58 (1B) of the MVAT Rules, seeks to enact a wide and arbitrary categorisation. Stage wise percentage provided under rule 58 (1B) has no basis, either for stage or for percentage of construction. According to them, percentage of material on which taxes are sought to be levied is on higher side and it is unfair and unconstitutional. The percentage prescribed is not in tune with ground realities and technical considerations. According to the petitioners, though prescription of table has been modelled on recommendations of Public Works Department, the same is insufficient and would not be applicable to the cases of developers. There is huge difference in the contracts with the Public Works Department and the nature of work of the developer, viz., Public Works Department contract provides for escalation, which is not the case with the developer. It is further contended that presumptions underlying the table under rule 58 (1B) that work is done on site as per stage given, yet it would not necessarily represent the way construction is carried out, in stages and in the sequences, for, it may be combination of various stages or activities may be simultaneous and as such, the table would not be able to give correct determination of value of work done at the time of entering into an agreement.”

There were elaborate arguments, which were considered by the Hon’ble Bombay High Court. Assuming that there may be some chances that valuation of goods may not be correct or some portion of immovable property may get taxed, the overall view of the Hon’ble High Court is that the rules are for uniformity and hence cannot be said to be invalid or unconstitutional. The Hon’ble High Court recorded its reasons, amongst others in following words:- “62. This Court is to consider validity of provisions valuing taxable goods for the purpose of charging duty. While enacting a measure to serve as a standard as levy, the legislation may not contour it along with the lines which spell out the character of the levy itself. Viewed from this standpoint, it is not possible to accept the contention that because the levy of MVAT is a levy on transfer of goods in a works contract, the value of goods must be limited to cost plus profit. The broader based standard may be adopted and would be within authority and power of legislation. A standard which maintains a nexus with the essential character of the levy can be regarded as a valid basis for assessing the measure of levy.

63. There is further consideration that the value shall be arrived at, assessed and ascertained on the modality as has been referred to under Rule 58 (1) (1A)and (1B) of the MVAT Rules. The value is a measure of tax and Rule 58 provides for determination of value of goods to be arrived at after deductions therefrom, referred under the rules/formulae. Values and items as referred to under Rule 58 (1), 58 (1A) and 58 (1B) are criteria for computing value of subject of tax at various stages as have been referred to under the Rules. Table under Rule 58 (1B) specifies the stages and value at the stages. The computation of value is to be done in accordance with the terms of the same. It is intended to determine value of goods and provides basis for determining such value.

The value has to be ascertained and determined in such a manner as is prescribed and shall be value of the subject of tax for the purpose of charging MVAT. The legislature, while enacting amended rules, did not intend to create a scheme materially different from the one in the previous rule 58 (1A) of the MVAT Rules. The object and purpose remained the same and so did original principle at the core of the scheme, and has been made more flexible and wider.

64. The first essential characteristic of MVAT is it is a tax on transfer of property in goods, secondly, uniformity of incidence is also a characteristic of the tax and thirdly the collection of tax. MVAT can be imposed on assessable value determined with reference to transfer of goods at the stage as referred to in the table. It is legislature’s power to legislate in respect of the basis for determining the measure of tax. The computation being made strictly in accordance with the express provisions under the rules, there is no warrant for confining the value as sought to be submitted by the assessee. It is open for the legislature to adopt any basis for determining the value of a taxable article. The measure for assessing the levy need not correspond completely to the nature of levy, and no fault can be found with the measure so long as it bears nexus with the charge. ……

67. The amended provisions define a measure of charge and the standard adopted by the legislature for determining value which may require/press for broader base than that on which the charging proceeds. By now, it is well settled that stage of collection need not in point of time synchronise with the transfer of property in goods
for as is being a long standing position that in our country levy has status of constitutional concept while the point of collection is to be located where the statute declares it. Taking into account this, the valuation of tax being made at the stages is a convenient mode for point of collection. It would not be necessarily confused with the nature of tax. Rule 58 (1B) envisages a method of valuation of tax at the stages as have been referred to under the Table for collection of the same. In order to overcome various difficulties, to have the value of taxable articles for the purpose of MVAT, the legislature or its delegate has prescribed table giving stages for the purpose of computation of value of subject of tax. This appears to have been provided in order to have uniformity and to avoid vagaries, disparity or inconvenience from case to case. The same has been incorporated after deliberation and consultation with concerned departments and would not be liable to be termed as arbitrary.”

Conclusion
Ultimately, the Hon’ble High Court has rejected the writ petitions. Therefore, the builders and developers will be required to follow the rules 58(1A), (1B) & (1C) as they are. There are chances that due to their inability to bring required certificates, there will be higher taxation. Though such taxation is on consonance with the above judgment, there would be certainly injustice to the builders and developers, who were otherwise also in the doldrums and also further burdened by way of interest, etc. The legislature should devising a practical/convenient procedure for certifying /supporting the deductions claimed. Till then, the plight of builders would continue.

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Nature of Lease Transaction of Cranes

Introduction
The identification of lease transaction is a vexed issue. The sale by “transfer of right to use goods” (Lease) is provided by a deeming clause in Article 366 (29A) of Constitution of India. However, there is no definition of the nature of lease transaction in constitution or in the respective sales tax laws. Therefore, its nature is required to be determined in light of decided cases. The controversy remains alive till the issue reaches the Supreme Court.

The decisions are also based on facts of each case.

BSNL case
One of the important judgments on the issue is of Supreme Court in case of Bharat Sanchar Nigam Limited (145 STC 91). In this judgment, the Hon’ble Supreme Court has specified criteria for deciding the nature of lease transaction. The said criteria can be reproduced below.

“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.”

However, in spite of such clear criteria laid down by highest court, the litigation continues.

Case of crane
There are commercial transactions where work is carried out by parties, with use of cranes. It is but natural that the customer who employees the crane owner will request /direct the crane owner to operate the crane as he requires. However, such transactions are being attempted to be classified as lease transactions by the state sales tax authorities.

Recently, there is judgment of the Hon’ble Bombay High Court in relation to such controversy.

Commissioner of Sales Tax vs. General Cranes
This judgment is given by the Hon’ble Bombay High Court on 21st April 2015 in Sales Tax Reference No. 5 Of 2009 In Reference To Application No. 72 Of 2005.

The facts in this case, as noted by the Hon’ble Bombay High Court, are as under.

“The facts, in brief, giving rise to the present Reference are as under:

The respondent is registered under the Lease Act and is engaged in carrying on the business of hiring of cranes. The respondent had filed an application under section 8 of the Lease Act for determination of question as to whether he would fall under the term of “dealer” under the Maharashtra Sales Tax on the Transfer of Right to use any goods for any purpose Act, 1985 (hereinafter referred to as the ‘Lease Tax Act’) along with Section 52 of the Bombay Sales Tax Act, 1959. The Additional Commissioner while dealing with the said application held that the respondents would fall within the definition of a ‘dealer’ and as such, the transaction entered into by him with M/s. Offshore Hook-Up & Construction Services (I) Pvt. Ltd. would be governed by the provisions of the said Act and as such taxable. Being aggrieved thereby, an Appeal came to be preferred. The learned Tribunal reversed the finding of the learned Additional Commissioner and held that the transaction entered into between the respondent and M/s. Offshore Hook-Up & Construction Services (I) Pvt. Ltd. would not amount to sale as defined u/s. 2(10) of the Lease Act.”

In subsequent paras, the Hon’ble High Court has reproduced certain relevant portion from the agreement between the parties. Thereafter, the Hon’ble High Court has referred to the definition and provisions of the Lease Act.

More particularly, the Hon’ble High Court has relied upon the judgment in case of BSNL (cited supra) and Rashtriya Ispat Nigam Limited 126 STC 114 (SC).

After analysing facts and legal position, the Hon’ble High Court observed as under, about nature of transaction:

“As already discussed hereinabove, the learned Tribunal has extensively reproduced the terms of contract which are also been reproduced by us hereinabove. Perusal of the terms of contract would reveal that as per the contract, the driver, cleaner, diesel and oil was to be provided by the respondent. So also, transportation of accessories was to be done by the respondent. It can further be seen that there is no provision in the contract that the legal consequences such as permissions or licences were to be transferred to the transferee. The ultimate control over the crane retained with the respondent. We find that the learned Tribunal, applying the judgment of Apex Court, has rightly construed that the transaction which were entered into by the respondent with Offshore Hook Up & Construction Services (I) Pvt. Ltd. would not fall within the meaning of Lease Act and the respondent was not a dealer within the meaning of definition of section 2(4) of the Lease Act.”

Thus, the Hon’ble High Court decided that there is no transfer of right to use goods and the judgment given by the Hon’ble Tribunal is correct as per facts and law.

The concept of effective control is also discussed by Hon’ble High Court in above para. Though the judgment is in relation to cranes it can apply with equal force to other such vehicles like, buses, etc. Therefore, the above judgment will be a guiding judgment for similar transactions.

Conclusion:
It seems as though, that the dealers have to wage a long struggle to get the correct position of Law decided. And this is happening due to fact that there is no definition of the ‘nature of lease transaction’. The parameters considered by different courts further add to the controversy. Therefore, it will be useful if a statutory definition of relevant terms is provided in the Law itself. Hopefully, due care will be taken in the drafting of GST Law.

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Nature of Lease Transaction, contradictions

Introduction
By deeming clause in
Article 366 (29-A) of the Constitution, the transaction of “Transfer of
Right to Use Goods” (Lease transaction) are made taxable under Sales Tax
Laws. The nature of lease transaction is not defined in the
Constitution or in any Act. The interpretation is done in light of
various judicial pronouncements.

Important judgment on interpretation on nature of lease transaction
Though there are several judgments, reference can be made to the followings:

Bharat Sanchar Nigam Ltd .(145 STC 91)(SC)
The
issue in this case was about levy of lease tax on services provided by
Telephone Companies. The Supreme Court held that no sales tax is
applicable as the transaction pertains to service. While holding so, one
of the learned judges on the Bench, observed as under in para 98 about
taxable lease transactions:

“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.”

Based on above parameters,
there are further judgments at various forums where the nature of lease
transaction is decided. Reference can be made to following judgments:-

Smokin’ Joe’s Pizza Pvt. Ltd . (A 25 of 2004 dt.25.11.08)(MSTT)
The
facts in this case were that the dealer was holding the registered
Trade mark “Smokin’Joe’s” 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. The lower authorities held the transaction as
taxable lease transaction. The Tribunal held that it is not a lease
transaction as it is not exclusive. This judgment is now before the
Bombay High Court by way of Reference.

Malabar Gold Pvt. Ltd . vs. Commercial Tax Officer, Kozhikode (58 VST191)(Ker)
This
judgment is of the Kerala High Court. In this case also, the
transaction was about granting of franchise right on non-exclusive
basis. The Hon. High Court has held that when the grant of franchise is
non exclusive it is not lease transaction and not liable to VAT.

On the other hand, there are a few contrary judgments as discussed below:

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 the
trade mark. The said use was also on non-exclusive basis. Still, the
Hon. A.P. High Court has held that the transaction is a lease
transaction. The Hon. High Court felt that the judgment of BSNL about
exclusive use cannot apply in relation to intangible goods like trade
mark.

Latest Judgment of THE Hon. Bombay High Court
Latest
in the series, there is a judgment from the Bombay High Court in case
of Tata Sons Ltd. vs. State of Maharashtra (W.P.No.2818 of 2012 with
Notice of Motion (L) No.214 of 2013 dt.20.01.2015).

In this
case, the use of brand name was allowed on nonexclusive basis. Before
the Hon. Tribunal, judgments including in case of Smokin’ Joe’s was
relied upon for nonliability. However, the Tribunal has confirmed the
liability. Therefore, this matter came up, before the Hon. Bombay High
Court, on behalf of the assessee. After referring the facts and various
judgments including in case of BSNL, the Hon. Bombay High Court has held
that even if use of right is given on non-exclusive basis, still it
will be a lease transaction. The observations of the Hon. Bombay High
Court are as under:

“50. Para 98 is relied upon by Mr. Chinoy.
However, that cannot be read in isolation and out of context. It must be
read in the backdrop of the underlying controversy, namely,
relationship between a telephone connection service provider and its
customer. Such a transaction is essentially of service.

51. It
is in relation to such a controversy that the observations, findings and
conclusions must be confined. We do not see as to how they can be
extended and in the facts and circumstances of the present case to the
enactment that we are dealing with. Going by the plain and unambiguous
language of the Act of 1985, we cannot read into it the element of
exclusivity and a transfer contemplated therein to be unconditional.
Therefore, the tests in para (d) and (e) cannot be read in the Act of
1985. 58. We are of the opinion that the Tribunal did not act perversely
or committed an error apparent on the face of record in rejecting the
petitioner’s appeals. May be the Tribunal could have rendered a detailed
finding and conclusion. However, upon perusal of the order passed by
the Tribunal we find that it referred to the facts. It has also adverted
to the contentions of the parties. It also referred to its own
conclusions rendered in the case of M/s. Smokin’ Joe’s etc. However, it
concludes that the facts and circumstances in the present case are not
identical to the cases dealt with by it and of the above franchisees. We
do not express any opinion as to whether the Tribunal’s conclusions in
the case of M/s. Smokin’ Joe’s (supra) and M/s. Diageo India (supra) are
accurate or correct. We are informed that separate proceedings in that
regard are pending in this Court. However, the Tribunal did not err in
holding that the cases which have been dealt with by it including the
Supreme Court judgment in the case of BSNL (supra) are on distinct
facts.”

Conclusion
Thus, the controversy is
increasing day by day. There is uncertainty in the mind of assessees as
to which is the correct tax applicable, whether service tax or VAT. In
fact, this has led to double taxation ultimately resulting in enhanced
cost to the assessees and correspondingly to the consumers. It is
expected that finality be brought to the above burning issue either by
legislative interference or by judgment of the Hon. Supreme Court.

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Lease vis-à-vis Service, Supremacy

Introduction There are a number of transactions in the commercial world which are to be executed by the doer with use of various equipments and instruments. There may also be such situations where the doer may be working for one specific customer for a sufficiently long period of time. Under above circumstances a question arises whether such transaction is for providing services or it is to be treated as ‘deemed sale’ by way of “transfer of right to use goods” i.e. lease transaction, which can be made liable under Sales Tax Laws.

By now there are a number of judgments and it can be said that the situation is very fluid in as much as there are contradictory judgments including from the Hon’ble High Courts.

Quippo Oil and Infrastructure vs. State of Tripura (77 VST 547) (Trip)

This is one of the latest judgments from the High Court of Tripura deciding on the controversy as referred to above. There were a number of petitions, but the facts as noted by the Hon. High Court in one of the cases, can be referred to as under:

The petitioner companies in this case entered into a contract with the ONGC for digging directional wells. As per the petitioners, digging directional wells has many components including Drilling Rig, Logging Services, Cementing, Mud Engineering, Directional Drilling etc. Directional drilling is one of the components of digging a directional well. According to the petitioners they have entered into a service contract providing service of directional drilling, and therefore, they are paying service tax to the Central Government. The petitioners contend that the contract does not amount to sale and no VAT can be levied on the same.

Based on above facts, the Hon. High Court has discussed the issue at length. The rival submissions are noted by the Hon. High Court by observing as under:

“The case of the State is that since a tax on the sale or purchase of goods includes in terms of sub-clause (d) of Article 366(29A) tax on the transfer of the right to use any goods for any purpose the petitioners are liable to pay value added tax on such transfer of right to use goods. The contention of the petitioners is that they have entered into a service contract and only the Union can levy tax on services and not the State. The petitioners have also urged that they are paying service tax to the Central Government under the provisions of law and since they are paying service tax, if there is conflict between the Central Law and the State Act the Tripura Value Added Tax Act must necessarily give way to the provisions which provide for imposition of service tax in the Finance Act of 1994.”

The Hon. High Court has referred to a number of citations, and, after full discussion arrived at the following conclusion:

“[33] As has been held by the Apex Court either a transaction shall be exigible to sales tax/VAT or it shall be exigible to service tax. Both the taxes are mutually exclusive. Whereas sales tax and value added tax can be levied on sales and deemed sales only by the State, it is only the Central Government which can levy service tax. No person can be directed to pay both sales tax and service tax on the same transaction. The intention of the parties is clearly to treat the agreement as a service agreement and not a transfer of right to use of goods. We are also clearly of the view that it is impossible from the terms of the contract to divide the contract into two portions and since the petitioners have paid service tax they cannot be also asked to pay value added tax. As held by the Delhi High Court in Commissioner, VAT , Trade and Taxes Department vrs. International Travel House Ltd. (supra), if there is a conflict between the Central law and the State Act then the Central law must prevail. The petitioners cannot be burdened with two different taxes for the same transaction.

[34] After carefully going through the contracts we are of the view that the contracts are mainly for hiring of services. There may be a very small element of transfer of right to use goods but according to us the pre-dominant portion of the contract relates to hiring of services and not to transfer of right to use the goods. We are aware that the dominant nature test is not to be used in composite contracts falling within the ambit of Article 366(29A) but from the reading of the contract it is more than apparent that the intention of the parties was to treat the contract as a contract for hiring of services. Moreover, it is impossible to divide the contract into two separate portions. Every element of the digging directional wells and Mobile Drilling Rig service contains a major element of provisions of services. In such an eventuality it is virtually impossible to divide the contract. It is not possible to work out the value of the right to use goods transferred under the contract. In cases, where the contracts are easily divisible or where the parties have by agreement clearly indicated what is value of the service part and what is value of the transfer of right to use goods part, the contract may be divided. We are in agreement with the Delhi High Court that when the contract cannot be divided with exactitude then the Central Law must prevail.

[35] Parties have also been paying service tax and if the State is allowed to tax any portion of the value of the contract then there has to be a proportionate refund of the service tax to that extent. This cannot be done without hearing the Union of India. If there is any dispute between the State or the Union of India then they must resolve it between themselves. The petitioners or the ONGC cannot be made liable to pay both the taxes for the same transaction.

[36] In view of the above discussion, we are clearly of the view that in all the cases the transactions do not amount to sale within the meaning of the TVAT Act, 2004. Therefore, all the writ petitions have to be allowed. The State is not entitled to levy any sales tax or Value Added Tax on the transactions in question. It is, therefore, directed that the amount of tax, already deducted and received by the State shall be refunded to the petitioners along with statutory interest latest by 28th February, 2015. In case the amount is not refunded by that date then the State shall be liable to pay interest @12% per annum with effect from 1st January, 2015.”

Conclusion
The above judgment is one of the determinative judgments which is very clear in its verdict. The laws laid down by the Hon. High court will certainly be guiding law for time to come. The businesses, at present, are very much under pressure due to an attempt by both the authorities to levy Service tax as well as VAT . The nature of transaction is to be decided by its dominant nature and if it is for providing services, then even if some element of leasing of instrument etc. is involved, it cannot be enforced by State Authorities. The Service Tax should prevail over Sales Tax/VAT . We expect that taking note of the above judgment, the sales tax department will not ask to pay sales tax where Service Tax is already paid as well as if at all the transaction attracts sales tax then the departments will make adjustment of payment inter-se and not ask the dealer to discharge double tax. This will be a real relief to the dealers.

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Interpretation of Entries and Role of Hon. Tribunal

Introduction

In the sales tax law, under which entry particular goods fall is always a debatable issue. There is lot of litigation in such matters. Numbers of judgments have been delivered. However, till today there is no finality about the issue.

To avoid such issues of interpretation, legislature sometime prescribe the entry in a more precise manner. For example, under Bombay Sales Tax Act (BST Act), there was an entry “C-I-29”, which reads as under:

“29. Industrial inputs and packing material, as may be specified by the State Government, from time to time, by notification in the Official Gazette.”

The notification issued prescribed various items of goods. The head note of the said notification dated 9.5.2002 was as under:

“No.STA .11.02/CR-99/Taxation-1 dt. 9.5.2002 – In exercise of the powers conferred by entry 29 in Part 1 of Schedule ‘C’ appended to the Bombay Sales Tax Act,1959 (Bom.LI of 1959), the Government of Maharashtra hereby, with effect from10th May,2002, and in suppression of the Government Notification, Finance Department, No.STA .11.01/CR-52/Taxation-1, dated the 14th May, 2001, specifies the following goods, more particularly described in the Schedule appended hereto to be Industrial Inputs and Packing Materials, whether sold under a generic name or and brand name, for the purpose of the said entry 29, namely:-“

Thus, it was made clear that only those goods which are specified in the Notification shall be considered for the purposes of Entry C-1-29. In spite of such a clear mandate that the notified good are “to be” the industrial inputs and packing material, still in one of the cases, Tribunal applied the common parlance meaning at its own imagination and in fact disallowed legitimate claim of the dealer. The reference is to the judgment of Hon. Tribunal in case of Samruddhi Industries Ltd. (Appeal No. 54 of 2004 dt. 28-02-2005).

Issue before Hon. Bombay High Court
Due to the above incorrect decision, the matter was referred to the Hon. Bombay High Court. The Hon. Bombay High Court has dealt with the issue in case of Samruddhi Industries Ltd. (Sales Tax Reference No.20 of 2006 dt. 23-12-2014). The issue was about classification of Ghamelas and other plastic items. They were covered by Central Excise Tariff heading 39.23. This was one of the notified heading in above notification.

However, the claim about coverage in entry C-I-29 was disallowed adopting ground of common parlance meaning.

The Hon. High Court disapproved such approach of the Hon. Tribunal. The Hon. High Court reproduced the observations of the Hon. Supreme Court about guidelines in deciding the classification as under:

“9. At the outset, we must refer to certain principles and which have been laid down by the Hon’ble Supreme Court. They guide us in interpreting the entries and the Notifications of this nature. In a recent case reported in AIR 2012 SC 1681, the Commissioner of Central Excise vs. M/s. Wockhardt Life Science Ltd., the Supreme Court reviewed and summarised these principles in the following words:

“30. There is no fixed test for classification of a taxable commodity. This is probably the reason why the `common parlance test’ or the `commercial usage test’ are the most common [see A. Nagaraju Bros. vs. State of A.P., 1994 Supp 20 (3) SCC 122]. Whether a particular article will fall within a particular Tariff heading or not has to be decided on the basis of the tangible material or evidence to determine how such an article is understood in `common parlance’ or in `commercial world’ or in `trade circle’ or in its popular sense meaning. It is they who are concerned with it and it is the sense in which they understand it that constitutes the definitive index of the legislative intention, when the statute was enacted [see D.C.M. vs. State of Rajasthan, (1980) 4 SCC 71 : (AIR1980 SC 1552)]. One of the essential factors for determining whether a product falls within Chapter 30 or not is whether the product is understood as a pharmaceutical product in common parlance [see CCE vs. Shree Baidyanath Ayurved, (2009) 12 SCC 419 : (AIR 2009 SC (Supp) 1090 : 2009 AIR SCW 3788); Commissioner of Central Excise, Delhi vs. Ishaan Research Lab (P) Ltd. (2008) 13 SCC 349]. Further, the quantity of medicament used in a particular product will also not be a relevant factor for, normally, the extent of use of medicinal ingredients is very low because a larger use may be harmful for the human body. [Puma Ayurvedic Herbal (P) Ltd. vs. CEE, Nagpur (2006) 3 SCC 266 : (AIR 2006 SC 1561 : 2006 AIR SCW 1384); State of Goa vs. Colfax Laboratories (2004) 9 SCC 83 : (AIR 2004 SC 45 : 2003 AIR SCW 5578); B.P.L Pharmaceuticals vs. CCE, 1995 Supp (3) SCC1 : (1995 AIR SCW 2509)].

31. However, there cannot be a static parameter for the correct classification of a commodity. This Court in the case of Indian Aluminium Cables Ltd. vs. Union of India, (1985) 3 SCC 284: (AIR 1985 SC 1201), has culled out this principle in the following words:

“13. To sum up the true position, the process of manufacture of a product and the end use to which it is put, cannot necessarily be determinative of the classification of that product under a fiscal schedule like the Central Excise Tariff. What is more important is whether the broad description of the article fits in with the expression used in the Tariff…”

32. Moreover, the functional utility and predominant or primary usage of the commodity which is being classified must be taken into account, apart from the understanding in common parlance [see O.K. Play (India) Ltd. vs. CCE, (2005) 2 SCC 460 : (AIR 2005 SC 1023 : 2005 AIR SCW 865); Alpine Industries vs. CEE, New Delhi (1995) Supp. (3) SCC 1; Sujanil Chemo Industries vs. CEE & Customs (2005) 4 SCC 189 : (2005 AIR SCW 5348); ICPA Health Products (P) Ltd vs. CEE (2004) 4 SCC 481; Puma Ayurvedic Herbal (AIR 2006 SC 1561 : 2006 AIR SCW 1384) (supra); Ishaan Research Lab (P) Ltd.(AIR 2008 SC (Supp) 540 : 2008 AIR SCW 6235) (supra); CCE vs. Uni Products India Ltd., (2009) 9 SCC 295 : (AIR 2009 SC (supp) 2403 : 2009 AIR SCW 6392)].

33. A commodity cannot be classified in a residuary entry, in the presence of a specific entry, even if such specific entry requires the product to be understood in the technical sense [see Akbar Badrudin vs. Collector of Customs, (1990) 2 SCC 203 : (AIR 1990 SC 1579); Commissioner of Customs vs. G.C. Jain, (2011) 12 SCC 713 : (AIR 2011 SC 2262)]. A residuary entry can be taken refuge of only in the absence of a specific entry; that is to say, the latter will always prevail over the former [see CCE vs. Jayant Oil Mills, (1989) 3 SCC 343 : (AIR 1989 SC 1316); HPL Chemicals vs. CCE, (2006) 5 SCC 208 : (2006 AIR SCW 2259); Western India Plywoods vs. Collector of Customs, (2005) 12 SCC 731 : (AIR 2005 SC 4405 : 2005 AIR SCW 5249); CCE vs. Carrier Aircon, (2006) 5 SCC 596 : (2006 AIR SCW 3910)]. In CCE vs. Carrier Aircon, (2006) 5 SCC 596 : (2006 AIR SCW 3910), this Court held:

“14… There are a number of factors which have to be taken into consideration for determining the classification of a product. For the purposes of classification, the relevant factors inter alia are statutory fiscal entry, the basic character, function and use of the goods. When a commodity falls within a tariff entry by virtue of the purpose for which it is put to (sic. produced), the end use to which the product is put to, cannot determine the classification of that product.”

In light of above, the Hon. Bombay High Court observed that the judgment given by the Hon. Tribunal is not correct. The Hon. High Court felt that the Hon. Tribunal should have applied the clear language to decide the issue and accordingly the matter would not have lingered for such a long time. The particular observations of the Hon. Bombay High Court are as under:

“12. A bare reading thereof, therefore would denote as to how the Industrial inputs and packing materials have been described. They have been brought in the single Notification and with this broad and wide description only on the footing that these are not ordinary plastic materials and utilised for household or domestic purpose. Once they are articles for conveyance or packing of goods, of plastics, stoppers lids, caps and other closures, of plastics and specifically excluding the bags of the type which are used for packing of goods at the time of a sale for the convenience of the customer including carrying bags then, there was no occasion for the Tribunal to ignore its plain wording. The description itself is such that the Revenue was aware that the Notifications have been issued and with Reference to the headings or sub-headings under the Central Excise Tariff Act, 1985. That the Industry requires not just traditional packing materials but of plastics and use of plastic is now extensive that the Notifications came to be issued and worded accordingly. There was never any doubt that these are materials of plastics but for conveyance or packing of goods. That goods are packed in plastic packing material for conveying and during industrial or commercial use is thus apparent. There was no occasion for the Tribunal, therefore to have brushed aside this wide wording and proceeded to hold at the initial stage that each of these are industrial inputs and packing materials. Assuming that foundation to be correct, yet, the Revenue relied upon that the description of the goods and the nature of the advertisement for sale of the goods establishes that all articles and manufactured by the Applicant are household. They are rarely used in the industries. It is unfortunate that at the appellate stage the Tribunal merely endorses such findings of the Commissioner. The Commissioner evolved, and with greatest respect, his own theory. He proceeded to analyse the Notifications and Entries. From his order, it is clear that he was aware of the legal principles. Interpretation of an entry is a question of law and whether particular goods and of a specific dealer would fall within the same or not are matters on which the Department or Revenue may take a view. However, the Tribunal endorsed this opinion of the Commissioner and the argument of the Revenue based thereon, namely, the description of the goods in the advertisement establishes that they are household articles. We are not impressed and in the least by such an approach of the Tribunal. The Court of Appeal has before it, original order and which is completely open for scrutiny. It is on fact and on law. The Tribunal ought not to have been carried away by only the case put up by the Revenue. The Tribunal is comprising of judicial members is expected to analyse the matter in its entirety. They are expected to apply their independent mind and not endorse the opinion of the Commissioner or the authorities under the Bombay Sales Tax Act or statutes analogous thereto. Therefore, to hold that the articles such as Ghamelas might be used in construction, agriculture etc. but they are not industrial inputs or packing materials would exhibit complete ignorance of the commercial word as well. It is for that reason that we emphasised the principles evolved by the Hon’ble Supreme Court. If they would guide us and they were equally binding and ought to have guided the Tribunal when it exercise its initial Appellate jurisdiction. In such circumstances, the plain reading of the entry and as made by the Tribunal in the initial stage while deciding the Appeal to be found in paras 10 to 12 of its order would demonstrate that it is this exercise which thereafter put the Tribunal itself in doubt. It is that doubt which required it to refer the questions to this Court. None would now therefore fault the Tribunal for reading the entry industrial inputs and packing materials properly. The fact that the Industrial inputs and packing materials have been notified throughout under the Notifications and in terms of the heading or sub-headings of these articles and materials under the Central Exercise Tariff Act, 1985 would show that household wares or domestic articles were not intended and rather never intended to be brought in. The exclusionary part of the entry itself will clarify this aspect. The articles of plastics and notified for use of conveying or carrying articles packed in plastic materials would denote that the understanding throughout was to bring in such articles which are used in trade, commerce and Industry. Therefore, on a plain reading of the entry itself the Tribunal should have in the initial stage decided the matter. That it ignored it and then referred the question for this Court’s opinion is clear from the above.

This resulted in an unavoidable delay. Matters of this nature ought to be finalised expeditiously and in the interest of certainty for both the dealer and the Revenue.”

Conclusion

Thus, the Hon. High Court expects that the Tribunal to work independently in the interest of both. Hon. High court has reversed the judgment of Hon. Tribunal and allowed the claim of classification under entry C-I-29 in favour of assessee.

shailesh.kwebmaker

REFUNDS UNDER MVAT Act, 2002

Introduction
Under fiscal laws like sales tax, there may be a situation that the party might have paid excess amount than what was due as per law. Therefore, there will be some amount refundable to the dealer. Under BST era, the assessment for each year was mandatory. Therefore, even if any claim of refund has remained to be made in returns, the dealer had an opportunity to claim the same in the course of assessment.

Under the MVAT Act, 2002, the situation has changed. As per policy of sales tax department, under the MVAT Act, 2002, assessment of each year is not compulsory and therefore the department can select assessment as per their own choice. Thus, the dealers may not get opportunity to put their refund claim, which they could have if assessment proceedings were taken up. The dealers are, therefore, required to pursue their refund claims with due care.

Relevant provisions
Under the MVAT Act, 2002, return filed by the dealer is considered as prime document. There are speaking provisions about granting refund as per returns. Section 51 of the MVAT Act, 2002 specifically provides the scheme for grant of refunds arising as per returns.

The important provisions of this section are that the dealer should show refund in the return. In respect of the said return, the dealer should file application in Form 501 and give the details as required in the said application. There is time limit for filing the above application. The normal time limit as on today is 18 months from the end of the relevant year in which refund arises.

If the dealer has filed an application as above, he is entitled to get the same processed and further entitled to refund as per the said proceeding.

Non filing of form 501
The issue is really arising in respect of those dealers, who have failed to file form 501 within the prescribed time. When such application is not filed, the department is of the opinion that the refund though shown in return is not required to be processed. In other words, department was of the opinion that in such cases, there is no responsibility of the department to process the return for granting refund.

Writ Petitions before the Bombay High Court
Dealers and consultants filed representations before the authorities to consider the refunds as per returns and process the same by initiating assessments etc. or by any other way. However, there was no positive response.

Therefore, several dealers started filing writ petitions in the Hon’ble Bombay High Court. Dealers raised several contentions for processing of returns. Important contentions were as under;
i) filing of application is procedural. It cannot be mandatory.
ii) return is the basic document and if the refund is shown in such return then there is already an implied application and it is required to be processed, if the return is within time prescribed for filing application in form 501.
iii) filing form 501 is one of the ways for getting refunds. There is no prohibition of granting refunds through other provisions including assessments, more so, when the dealers are ready to undergo the said process.
iv) If there is no speaking assessment then the return should be considered as self assessment and accordingly also refund should be granted.
v) Non grant of refund will amount to unjust enrichment.

The Hon’ble Bombay High Court, in cases of Jubilee Industries (W.P. No.121 of 2015) Tara Enterprises (W. P. No.122 of 2015), B. L. Trading Company (W.P.123 of 2015) dt.3.2.2015, directed the department to dispose of the applications, without going into merits.

However, in its Judgment in case of Silver Dot Convertors Pvt. Ltd. (W.P.1118 of 2015 DT.3.3.2015), the Hon’ble High Court considered the overall position and opined that the refunds shown in returns are required to be processed by the department and they cannot ignore them. The High Court has not dealt with the legal ground but based, its decisionon the accepted theory that a dealer should be finally assessed as to whether he liable to pay any dues or entitled to a refund, and directed department to process the returns showing refunds and pass the orders. The relevant portion of speaking order of the Hon’ble High Court is as under;

“5) We only desire that none of such applications as are noted by us and in the Petitions are kept pending by the department/ Respondents. If the returns are furnished and submitted, then, they deserve to be scrutinised. If they should be scrutinised expeditiously and early and equally the claims for refund in pursuance thereof, then, the only direction that we issue is that the Respondents process such cases and as expeditiously as possible.

6) Each of these matters were kept back in the morning session to enable Mr. Sharma to seek instructions from the concerned officials.

7) It is stated that pursuant to our oral direction, the Commissioner of Sales Tax is present in Court. He has instructed Mr. Sharma to state that all the returns and which are subject matter of the Petitions on today’s board and equally those pending with the department would be taken up for scrutiny and verification periodically and as far as the Petitioners are concerned, the returns would be processed and the requisite orders would be passed within a period of 4 weeks from the date of receipt of copy of this order. We accept these statements made by Mr. Sharma and in the presence of the Commissioner of Sales Tax as an undertaking given to this Court. We expect the Respondents to abide by the same and take requisite steps.

8) We clarify, in the event of any doubt, as orally expressed, that the direction to pass order and based on the undertaking given to the Court is confined to the Writ Petitions which are on today’s board and insofar as the other pending files are concerned, the same should be processed as expeditiously as possible and in any event within a period of 8 weeks from the date of receipt of copy of this order. The Writ Petitions are accordingly disposed of.”

Based on above, the Department has now started processing the returns in which refunds are shown. As per the Hon’ble High Court’s order, it appears that the responsibility is on the Department to process the returns, involving refund, on their own. However, on the safer side, it may be suggested that the dealer should write a letter to the department for processing his return.

In light of above, the Department has issued instructions by internal circular to process the refunds for the period from 2007-08 onwards. In respect of the years 2005-06 & 2006-07, the department feels that the returns cannot be processed as the time limit for assessments is over.

But, there could be a view that in respect of 2005-06 & 2006-07, as well the department should grant refunds by considering that there is a self assessment as per section 20 i.e. there is a statutory assessment and the refund is required to be granted accordingly.

Conclusion
The above judgment of the Hon’ble Bombay High Court has given great relief to the dealers. As a guardian of public, it is the duty of the Government to give fair treatment to the dealers. The basic structure of the taxation law is also that nobody should be made to suffer a liability, in excess of what is due as per law. Under above circumstances, it was necessary that the refunds shown in returns are dealt with by the department. Even if form 501 is not filed, there is no prohibition to initiate assessment and to see that due refund is granted. The above judgment has, therefore, restored the constitutional obligation of the Department. We hope that the said principle will remain applicable for all the time to come including in the GST era.

shailesh.kwebmaker

Export order prior to “Sale” for section 5(3) of CST Act,1956

Introduction
As per the provisions of Constitution, no tax can be levied on the transaction of sale in course of export. The term “sale in course of export” is defined in section 5 of the CST Act,1956. Section 5(1) defines direct export. There is also category of deemed export by way of section 5(3) of the CST Act,1956. The said section provides exemption to one sale taking place prior to actual export sale. The section is reproduced below for ready reference.

“S.5. When is a sale or purchase of goods said to take place in the course of import or export. –

(3) Notwithstanding anything contained in s/s. (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export..”

Conditions required to be fulfilled
There are number of points of dispute in relation to interpretation of above section. As per the overall interpretation, following conditions are required to be fulfilled for earning exemption under this section.

1. There should be pre existing export order from the foreign buyer with Indian seller (Indian exporter).
2. The Indian exporter should purchase goods from another Indian vendor for compliance of above export order.
3. There should be actual export by the Indian Exporter.

Controversy
Number of controversies arise on account of interpretation of above conditions. The basic controversy sometime relates to date of sale by local vendor to exporter and the date of receipt of Indian export order by the exporter. The sales tax authorities interpret that the exporter should place order on the local vendor only after receipt of export order from the foreign buyer. The further argument of the dealer can be that the exporter can receive proposal for export or may initially receive export order verbally (and then confirmed subsequently in writing). The argument will be that even if the order is placed on receipt of verbal order or based on proposal it should be valid subject to the condition that before actual sale by the local vendor to Indian exporter there is a confirmed export order from the foreign buyer. Accordingly dealers argue that their sale to Indian exporter should be covered by section 5(3) and exempt. However, the litigation arises due to such difference in interpretation.

Recent Judgment
Hon. Bombay High Court has recently an occasion to deal with such a controversy. The reference is to judgment of Hon. High Court in case of Exide Industries Ltd. vs. The State of Maharashtra (W.P. No.12025 of 1012 dt. 4.8.2014)(Bom).

The short facts as narrated in the judgment are reproduced below.

“3. The short but very interesting question that has arisen for consideration before us is the interpretation of section 5 of the Central Sales Tax Act, 1956 (CST Act) and in particular s/s. 3 thereof.

Section 5(3) inter alia provides that notwithstanding anything contained in s/s. (1), the last sale or purchase of any goods, preceding the sale or purchase occasioning the export of those goods out of the territory of India, shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order in relation to such export. In the facts of the present case under a purchase order/agreement dated 5th March, 2004 M/s. Crown Corporation Pvt Ltd (hereinafter referred to as “M/s. Crown”) required the Petitioner to supply Submarine Navy Batteries of the type and specifications more particularly set out therein. On 25th May, 2004 the Algerian Navy placed a purchase order on M/s. Crown, for the supply of Submarine Navy Batteries. On 14th September, 2004, the Petitioner sold and supplied Submarine Navy Batteries to M/s. Crown, who in turn exported the same to the Algerian Navy. The ARE -1 was prepared by the Petitioner on 14th September, 2004 showing the Petitioner as the seller, M/s. Crown as the purchaser, and the Algerian Navy as the consignee. In these circumstances, the Petitioner contends that the sale effected by them of Submarine Navy Batteries to M/s. Crown, is exempt from the levy of sales tax under the BST Act by virtue of the provisions of section 5(3) of the CST Act. On the other hand, the Respondents contend that since the purchase order placed by M/s. Crown on the Petitioner on 5th March, 2004 was before the date when the Algerian Navy placed the purchase order on M/s. Crown (i.e., on 22nd May, 2004), the sale by the Petitioners to M/s. Crown did not take place after, and for the purpose of complying with, the agreement or order of the Algerian Navy (i.e., on 22nd May, 2004). It was therefore not “for or in relation to such export” as contemplated under the provisions of section 5(3) of the CST Act. It is in this light that we are called upon to decide the interpretation of the said provision. After adverting to the facts, we will analyse the provisions of the CST Act in some depth, later in this judgment.”

After referring to the facts in detail, the Hon. High Court on merits of the case observed as under:

“26. Section 5(1) of the CST Act stipulates that a sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India, only if the sale or purchase either occasions such export, or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India. As, the section originally stood prior to its amendment in 1976 and thereafter in 2005, the sale by an Indian exporter from India to the foreign importer, alone qualified as the sale which had occasioned the export of the goods. According to the Export Control Order, exports of certain goods could be made only by specified agencies such as State Trading Corporations. In other cases also, manufacturers of goods, particularly the small and medium scale, had to depend upon some export houses for exporting their goods because special expertise was needed for carrying on the export trade. A sale of goods made to an export canalising agency such as State Trading Corporations or to an export house, in compliance with an existing contract or order, was inextricably connected with export of the goods. At the same time, since such a sale did not qualify as sales in the course of export, they were liable to State Sales Tax which corresponded in the increase in the price of the goods and made exports out of India uncompetitive in the fiercely competitive international markets. To tackle this problem, section 5 was amended by the Central Sales Tax (Amendment Bill, 1976) by inserting s/s. (3) therein to provide that the last sale or purchase of any goods preceding the sale or purchase occasioning export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for, or in relation to, such export. This is the legislative intent in inserting s/s. 3 to section 5 of the CST Act.

The word “sale” also has been defined in the Central Sales Tax Act u/s. 2(g) which reads as under :-

2(g) ‘sale’ with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration and includes –

a transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

a delivery of goods on hire-purchase or any system of payment of instalments;

a 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;

a supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

a supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, but does not include a mortgage or hypothecation of or a charge or pledge on goods.

As defined u/s. 2(g), a sale means any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration and also includes transfers as set out in clauses (i) to (vi) of section 2(g). In view thereof, the words “last sale” appearing in section 5(3) of the CST Act will have to be construed keeping in mind the definition of the word “sale” in section 2(g).

Keeping in mind the provisions of section 5(3) and section 2(g), we have to decide whether the purchase order/agreement dated 5th March, 2004 placed by M/s. Crown on the Petitioner would be a “sale” as contemplated u/s. 5(3) r/w section 2(g) as contended by the Revenue, or whether selling and supplying the Submarine Navy Batteries to M/s. Crown on 14th September, 2004 would fall within the word “sale” as contemplated under the said provisions. To our mind, it is clear that the purchase order/ agreement dated 5th March 2004 between the Petitioner and M/s Crown can never be construed as a “sale” as contemplated under the provisions of section 5(3) of the CST Act. As set out earlier, section 2(g) defines the word “sale” to mean any transfer of property in goods by one person to another for cash or deferred payment or for any other valuable consideration and includes transfers as more particularly set out in clauses (i) to (vi) of the said section. We do not find that the purchase order/ agreement dated 5th March, 2004 can by any stretch of the imagination fall within the definition of the word “sale” in section 2(g). This is for the simple reason that the word “sale” contemplates inter alia transfer of the goods or a transfer of the right to use any goods for any purpose or delivery or supply of goods [See. Section 2(g), Clauses (i), (iii), (iv), (v), (vi)] by one person to another. In the peculiar facts of this case and after carefully perusing the purchase order/agreement dated 5th March, 2004 between the Petitioner and M/s. Crown, we are of the view that there was no “sale” of the Submarine Navy Batteries by virtue of the said purchase order/agreement.

In the facts of the present case, there was no transfer of goods as contemplated u/s. 2(g) of the CST Act. On a perusal of the said agreement and its various clauses, at the highest, it can be said that the same amounts to an “agreement to sell”, that maybe performed at a future date by the Petitioner. It is this performance that translates into a “sale” of the Submarine Navy Batteries.

In the facts of the present case, we find that in performance of the purchase order/agreement dated 5th March, 2004, the Petitioner sold and supplied the Submarine Navy Batteries to M/s. Crown on 14th September, 2004. This sale was after the date when the Algerian Navy placed its purchase order on M/s. Crown. The purchase order placed by the Algerian Navy on M/s. Crown was dated 22nd May, 2004. In this view of the matter, we find that the sale of the Submarine Navy Batteries by the Petitioner to M/s. Crown was the “last sale preceding the sale occasioning the export” as contemplated u/s.

5(3) and the same took place after, and for the purpose of complying with the purchase order dated 25th May, 2004, placed by the Algerian Navy on M/s. Crown. In view thereof, the sale of Submarine Navy Batteries by the Petitioner to M/s. Crown on 14th September, 2004 were deemed to be in the course of export as contemplated u/s. 5(3) of the CST Act and therefore, could not be taxed as a local sale under the provisions of the BST Act.”

Conclusion

Thus the controversy is now resolved. The requirement is that there should be an export order prior to sale to Indian Exporter. Therefore, even if the local vendor supplies to the Indian exporter based on export proposal with the Indian exporter, but confirmed export order is received by the Indian exporter before actual sale by the local vendor to Indian exporter, still there will not be any difficulty in application of section 5(3) and exemption will be available.

levitra

shailesh.kwebmaker

Belated refund applications and refund under MVA T Act, 2002

Introduction
Under the Maharashtra Value Added Tax Act, 2002 (MVAT Act), there are a number of new procedures as compared to the earlier regime of the BST Act. The major departure is in regard to getting refund as per the records of the dealer.

Earlier, there used to be speaking assessments orders in all cases. Therefore, irrespective of the data in the return in the course of assessments, dealers were able to put before the assessing authority the correct position, as per record and also used to get refunds as per the said records. Thus, even if refund was not claimed in the return, the dealer could, in the course of assessment, put forth his claim.

Refund as per returns under MVA T Act, 2002
Under the MVAT Act, there is a prescribed procedure for getting refunds as per returns. The procedure for granting refunds is given in section 51 of the MVAT Act, 2002. If a dealer is entitled to a refund, as per returns filed by him, then he can file an application u/s. 51 (form 501) for claiming the said refund. The department can process the application and if satisfied, refund will be granted.

However, there is time limit for filing such an application for refund. Upto 2008-09, the said time limit was three years. On 01-05-2011 section 51(7) was amended, so as to curtail the time limit from three years to 18 months. As per the interpretation of the Department, the said curtailed period was to apply from the year 2009-10. However, the matter was contested before the Hon’ble Bombay High Court and in case of Vaibhav Steel Corporation (69 VST 460), it was held that refund being a substantive right, the amendment should apply prospectively and can not apply to prior periods. Accordingly, in the above case, though application for the year 2009-10 was filed after 18 months but as it was within 36 months, the Hon’ble High Court directed the authorities to process the application.

Refund application for 2010-11
In the case of Vaibhav Steel Corporation, the issue was about 2009-10. Therefore, there was uncertainty about application of the said ruling to the period 2010-11. It was contended by the department that the said ruling will not apply to the period 2010-11.

Recent judgment in case of Sagar Enterprises
Recently, the Hon’ble Bombay High Court had one more occasion to deal with the above controversy. In the judgment in the case of Sagar Enterprises (WP No. 12191 of 2013, dated 15-07-2014), in addition to the period 2009-10, year 2010-11 was also involved, the Hon’ble High Court has observed as under;

“2. The claim of the Petitioner is for refund. That arises in the backdrop of the returns for the Financial Years 2009- 2010 and 2010-2011 under the Maharashtra Value Added Tax Act, 2 002. The Petitioner claims that as per section 61 of the Maharashtra Value Added Tax Act, 2002 the Audit Report was filed before the due date prescribed. The Audit Report for the aforesaid period resulted in refund to the tune of Rs.17,51,801/- and Rs. 7,24,218/- respectively.

3. The Petitioner claims that he approached the Authorities for refund being a dealer covered by the Act, but what has been brought to his notice is the circular under which the Commissioner notified that all such applications and to seek refund ought to be within the period prescribed by s/s. (7) of section 51 of the Act. It is urged that the circular insists that the Maharashtra Act No. XV/2011 by which section 16(4) was inserted w.e.f. 01-05-2011 would govern the claim. Meaning thereby, that an application for refund cannot be entertained unless it is made within 18 months from the end of the year containing the period to which the return relates.

4. The learned counsel appearing for the Petitioner states that the words “18 months” were substituted for the original words “three years” by the Maharashtra Act No. XV/2011 w.e.f. 01-05-2011. This cannot govern the claim for refund for the prior period. In fact the Assessment Orders passed by the Deputy Commissioner of Sales Tax, Business Audit Branch, Mumbai and the Assistant Commissioner of Sales Tax, Refund Audit Branch are referred to in the petition. Thus, it is submitted that so long as the claim of the Petitioner pertains to the Accounting Years 2009- 2010 and 2010-2011 the applications for refund could have been filed within a period of three years and not the curtailed period. The circular, therefore, travels much beyond the legal provision and in any event the circular cannot govern and control interpretation of the subject legal provision, is the submission of the Petitioner’s Advocate.

5. Mr. Vagyani, learned Government Pleader appearing on behalf of the Respondents, on instructions, states that though such stand has been taken and reiterated in the affidavit filed by the Joint Commissioner (Respondent No. 3) in reply to this Writ Petition, now he has received instructions to state before this Court that the Petitioner’s refund applications shall be processed after they being treated as filed under the unamended provision. The refund applications shall be processed and an order will be passed thereon as expeditiously as possible and before 31st August, 2014.

6. We accept these statements made by Mr.Vagyani on instructions, as undertakings given to this Court. We direct that the refund applications of the Petitioner be processed and disposed of accordingly. No further extension will be granted under any circumstances.”

In light of above, it appears that for 2010-11 also the time limit to submit refund applications was three years. Therefore, the dealers, who have not uploaded applications within 18 months but have submitted it within 18 months thereafter with covering letters etc., will be eligible to take benefit of above judgment.

However, the issue still remains where the applications have not been filed within 36 months. The issue also remains for the other years where there has been a delay in submitting refund applications.

In the above writ petition, the learned advocate for the petitioner brought to the notice of the Hon’ble High Court 252 other cases for which there is delay and hence, the refunds have remained pending. The Hon’ble High Court has called for details and thereafter further action will be taken.

From the above legal position, it appears that the claims of refunds should be considered by Department in substance without rejecting them on technicalities. The dealers can expect relief in regard to refunds irrespective of filing of belated application etc.

Set off vis-à-vis details from vendors
At present under the MVAT Act, set-off is allowed/ disallowed based on cross checking of J1 & J2 annexures given with VAT Audit report in Form 704.

In case of mismatch, set-off is disallowed. In assessment/ appeals department directs furnishing of revised J1/J2 to allow set-off or the copy of Form 704 of vendor etc. On non-production of above, set-off is disallowed.

Before the Tribunal, in the case of Modern Steel (VAT App. No. 47 & 48 of 2014 dt.13-06-2014 readwith Corrigendum dt. 09-0702014). Similar facts arose.

The facts and direction of the Hon. M.S.T. Tribunal are as follows:-

“4. In the Second Appeal, Shri C. B. Thakar, the learned Advocate submitted that the set-off cannot be disallowed on the ground that the purchase are not disclosed by the vendor in the audit report in Form 704 or even has not filed the audit report. He, therefore, submitted that the appeal be remanded for verification of the purchases and enquiry concerning the transactions of M/s. Munirs Dismantling Company/Corporation.

6. On perusal of the appeal order and assessment order concerning the disallowing of set-off of m/s. munirs Dismantling Company/Corporation, we find that both the authorities have not enquired into as to whether the reports are filed and tax is paid on the said transactions also. We do not find that both the authorities have verified the purchases of m/s. munirs dismantling Company/ Corporation. the enquiry conducted by both the authorities is incomplete and require further inquiry and verification. In this view, the order passed by the appellate authority is not sustainable disallowing set-off of rs.1,99,500/- and is liable to be set aside and matter needs to be remanded to the appellate authority for verification and further inquiry.

7. If set-off is allowed, the same would be available for adjustment of CST dues and there would be no demand in CST appeal. For the reason, it is necessary to set aside the order in CST appeal also. for the forgoing reasons, we pass the following order:

VAT Second Appeals Nos. 47 & 48 of 2013 are allowed. The disallowing of set off on purchase transactions of m/s. munirs dismantling Company/Corporation is set aside. The appellate authority is directed to verify the transactions of m/s. munirs dismantling Company/Corporation and find whether the tax is paid into Government Treasury and decide the claim of set-off in accordance with law and on assessment of the set-off, the refund if found due may be adjusted as per the provisions of law against CST demand and shall recompute the sales tax liability.

Accordingly, appeals are disposed off. Proceedings are closed.” the hon. tribunal has clearly ruled that simply on basis of non disclosure by vendor or non production of copy of form 704 of vendor, set-off cannot be disallowed. The verification of payment of tax by vendor is required to be brought on record.

This judgment gives useful guidance in the matter of verification of set off claim by the Department.

Matching on electronic system may be a good tool in hands of department to initiate further inquiry. however, it cannot be the basis for disallowing set off. Accordingly verification of payment by due legal procedure is necessary on part of department.

It is expected that department will follow the direction of the tribunal in pith and substance and not subject the buyers to unwarranted and unjustified set-off disallowance and levy of interest and penalty.

shailesh.kwebmaker

Sale in course of export, whether within the purview of the Local Act?

Introduction
The sales or purchases taking place in the course of import/export are immune from sales tax as per Article 286 of the Constitution of India. Therefore, such transactions are exempt from sales tax (VAT). The transactions of export sales and sale in the course of export are defined in section 5(1) & 5(3) of the Central Sales Tax Act,1956 (CST) as under;

Section 5. When is a sale or purchase of goods said to take place in the course of import or export. –

(1) A sale or purchase of goods shall be deemed to take place in the course of the export of the goods out of the territory of India, only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

(3) Notwithstanding anything contained in s/s.(1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.

Controversy
A controversy that had arisen and still remains, is as to whether the export sale is to be first considered as effected within the State in which the goods for export are ascertained and then categorised as ‘export sale’? If the sales are first considered as sales within the State from which export is made then they will form part of the turnover in the said State and then deduction will be given towards export sale. This will have a number of implications as per provisions of the Local Act. On the other hand, if it is considered that they are outside the purview of the Local Act then they will not form part of the turnover in that State and will remain outside the turnover. This may also have its own repercussions as per provisions of the Local Act.

Issue before the Hon’ble Bombay High Court
A controversy arose before the Hon’ble Bombay High Court in respect of interpretation of Rule 42H of the Bombay Sales Tax Rules (BST). The Hon’ble Bombay High Court has reproduced the rule, the relevant portion of which is reproduced below:

“R. 42H. Drawback, setoff etc. of tax paid on goods purchased by a dealer liable for levy of value added of sales tax on goods specified in Schedule C.

(1) While assessing the amount of tax payable by a Registered dealer (hereinafter, in this rule, referred to as “the claimant dealer”) in respect of any period starting on or after the 1st October 1995 on his sales of goods (being goods in respect of which the deduction from turnover of sales has not been allowed under sub-section (1) of section 8 because of the provision contained in s/s. (3) or, as the case may be, in sub-section (3A) of section 12A, the Commissioner shall, subject to the provisions of sub Rule (2), grant him drawback, setoff or, as the case may be, a refund of aggregate of the sums determined in accordance with the provisions of Rule 44D in respect of purchase of such goods including the goods used for packing of such goods.

Provided that, drawback, set off or, as the case may be, refund under this rule shall not exceed the tax payable on the sale of such goods, not being sales against any declaration or certificate prescribed under the Act, Rules or as the case may be, any entry of Schedule to the notification issued u/s. 41:

Provided further that, if the dealer effects any sales by way of a delivery of goods as hire purchase of any system of payment by instalments, then the amount of drawback, setoff, or as the case may be, refund under this rule shall be in proportion to the purchase price of that instalment.”

The appellant dealer has sold goods against form 14B, so as to claim exemption u/s. 5(3) of the CST Act,1956 r/w Rule 21A of the BST Rules.

The department interpreted that since the sales covered by section 5(3) cannot be said to be disallowed because of section 12A of the BST Act,1959, the set off is not admissible on the purchases relating to such sales under rule 42H. On the other hand, the dealer was canvassing that first it is a local sale covered by BST Act, 1959 and since resale is not admissible, he has sold the goods against form 14B and hence, set off is admissible.

After noting the controversy, as above, the Hon’ble High Court observed as under in relation to nature of sales effected u/s. 5(3) of the CST Act:

“13) A bare perusal of this Rule would indicate that a dealer may make a claim that he is not liable to pay tax under the BST in respect of his sale of goods on the ground that the sale of such goods is a sale in the course of export of the goods out of the territory of India within the meaning of sub-section (3) of section 5 of the CST. He can therefore produce a certificate in the Form referred by us above along with evidence of export of such goods and claim exemption in respect of the liability to pay the Sales Tax. Pertinently, this form has to be filled in and signed by the exporter to whom the goods are sold. Section 5 of the CST contains s/s. (3). Section 5 has been inserted in the CST so as to determine as to when a sale or purchase of goods can be said to be taking place in the course of import or export. Sub-Section (3) was inserted therein with retrospective effect from 1st April, 1976, which reads as under:

“(3) Notwithstanding anything contained in s/s. (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.” 14) A bare perusal thereof would indicate that the same has been inserted so as to take out of the purview of the provision namely, section 5, the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India. That is also deemed to be in the course of such export, provided such last sale or purchase took place after and was for the purpose of complying with an agreement or order for or in relation to such export. Ordinarily this would not have been within the purview of sub-section (1) of section 5. Therefore, notwithstanding anything contained in sub-section (1) of section 5, such sale or purchase is also deemed to be in the course of the export. This aspect becomes clear if one peruses section 75 of the BST, which specifically excludes, from the purview of the BST, certain sales and purchases. This section reads as under:

Section 75 Certain sales and purchases not to be liable to tax.
Nothing in this Act or the rules made thereunder shall be deemed to impose or authorise the imposition of a tax on any sale or purchase of any goods, where such sale or purchase takes place (a) (i) outside the State; or (ii) in the course of the import of the goods into the territory of India, or the export of the goods out of such territory; or (b) in the course of interstate trade or commerce, and the provisions of this Act and the said rules shall be read and construed accordingly.

Explanation. For the purpose of this section whether a sale or purchase takes place
(i) outside the State, or
(ii) in the course of the import of the goods into the territory of India or export of the goods out of such territory, or
(iii) in the course of interstate trade or commerce, shall be determined in accordance with the principles specified in section 3, 4 and 5 of the Central Sales Tax Act, 1956.”

15) Therefore, the sales and purchases which are not liable to tax under the BST by virtue of section 75 have been rightly excluded or taken out of the purview of Rule 42H and that is the only interpretation which can be placed on the said Rule. If one peruses section 5 and particularly s/s. (1) and s/s. (3) of the CST together with section 75 of the BST, Rule 21A of the Bombay Sales Tax Rules, Form N14B harmoniously and together, it would be apparent that what is not within the purview of the BST can never be brought in for the purposes of claiming a deduction or setoff under Rule 42H. If that is the intent of legislature and it has been given effect to by the Tribunal in the impugned order, then we do not find that its conclusion is vitiated.”

Conclusion
From the above observations, an inference arises that the sales covered u/s. 5(3) of the CST Act cannot be considered as within the purview of Local Act. The implication is that it cannot be clubbed into turnover under Local Act at all. However, there are earlier judgments like M/s. Onkarlal Nandlal vs.State of Rajasthan (60 STC 314)(SC) and also N. D. Georgopoulos vs. State of Maharashtra (37 STC 187)(bom), wherein it was held that the situs of export sale is in the State, from where the sale is effected i.e., from where the export is made. In other words, it is first considered to be within purview of the Local Act and then the deduction.

The above judgment of the Bombay High Court creates a different scenario. This will certainly be a pointer for debate and a further judgment may have to be awaited to get the clarity.

shailesh.kwebmaker

Sales vis-à-vis Free supply of goods

Introduction
Sales tax is leviable, when there is sale of goods. The term ‘sale’ is defined in the sales tax laws. The Hon. Supreme Court has also analysed the said term in number of judgments. The landmark judgment is in case of Gannon Dunkerly and Co. (9 STC 353)(SC), wherein the Hon’ble Supreme Court has observed as under in relation to ‘sale transaction’:

From above passage it is clear that to be a ‘sale’ following criteria need to be fulfilled.

(i) There should be two parties to contract i.e. seller and purchaser,
(ii) The subject matter of sale is moveable goods,
(iii) T here must be money consideration and
(iv) Transfer of property i.e. transfer of ownership from seller to purchaser.

Therefore before levying sales tax, fulfillment of above criteria is necessary.

Amongst others, it is also clear from the above that the consideration is one of the requirements for constituting ‘sale’ and in fact that is the measure of tax, normally referred to as “sale price”. Determination of sale price is debatable issue.

Free supply by customer
Sometimes, the buyer supplies certain items like moulds, tools and dies etc. to the supplier. The said supply is for manufacturing goods which are eventually to be sold to the said buyer who has supplied such items. Since such items belong to the buyer, the buyer may be writing off such items in their books of account by way of amortisation (also can be equated with depreciation). For purpose of excise payment such amortisation may be added to the cost of such items supplied by the supplier. However, question arises whether such amount is required to be added in the sale price of the supplier and whether supplier is liable to pay tax on such higher value.

Consideration by the Hon’ble Supreme Court
The Hon’ble Supreme Court had an occasion to deal with such situation in case of Ts Tech Sun (India) Ltd. vs. State of Uttar Pradesh and others (15 VST 559)(SC). The facts as narrated by the Hon’ble Supreme Court in para 11 are as under:

“Department, in this case, has sought to load amortized cost of the moulds supplied by its customer to the sale price of auto components in the hands of the appellant herein. According to the department, under section 4(1) (a) of the 1944 Act, value has to be the normal price, which has to be the sole consideration and if the price fixed is without consideration for the moulds then, according to the department, it cannot be said that price was sole consideration. In other words, according to the department, if the consideration for moulds is not taken into account then under the excise law, price, which is the measure of value, cannot be said to be the sole consideration. According to the department, in this case, price of auto components sold by the appellant was fixed or to be fixed by inter se negotiations. That, without the price of the moulds being taken into account, the price of the finished product would not reflect the real assessable value. According to the department, without the supply of moulds from its customer, final product could not be made. By use of the moulds, the appellant was able to manufacture the auto components. Therefore, according to the department, some money value was required to be attributed on account of usage of moulds as such moulds contributed to the value of the final product, namely, auto components. Therefore, by not taking into account the money value of moulds supplied by the customer, the price stood depressed. In the circumstances, according to the department, amortised cost had to be loaded to the price charged or chargeable by the appellant for the finished products.

On the above case of the department, the question which arises for determination in this civil appeal is whether section 4 of the 1944 Act read with rule 6 of the Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 (“Excise Valuation Rules, 2000”) can be read into section 3 of the U.P. Trade Tax Act, 1948?”

The Hon’ble Supreme Court thereafter analysed the legal position with reference to Excise law and Sales tax. The relevant observations of Hon’ble Supreme Court are in para 16 as under:

“Before analysing section 3 of the 1948 Act, it is important to keep in mind that in income-tax cases, tax is exigible on “real income” which means the actual income received by or which accrues to the assessee. In case of sales tax, tax is exigible on real price received or receivable by the dealer in respect of a sale. A dealer is entitled to frame his price-structure in a manner conducive to the type of his business or with a view to withstand the competition. In a given case, cost may be more than the price. The dealer may base his price-structure to give an incentive to his clients, agents, distributors, etc., particularly if he is a manufacturer. In such cases, his price-structure has to be scrutinised by the department under the sales tax law to find out the real sale price receivable by him. There may be cases where he is required to give a discount on account of defect in quality or delay. The important thing to be noted is that “price” is the amount of consideration which a seller charges the buyer for parting with the title to the goods. It comprises of the amount which the dealer himself has to pay for the purchase of the goods, the expenditure, which he is to incur for transporting the goods from the place of purchase to the place of sale, the duties, if any, levied on the particular goods bought by him, the octroi duty, which he may have had to pay and his own margin of profit after meeting handling charges including interest on the capital invested. The cost price of the goods actually paid by him under various heads of accounts would no doubt constitute the consideration for which he would part with his title to the goods. The entire amount of consideration, including the sales tax component, which the purchaser pays, would constitute the price of goods. To this extent, there is no difficulty. The difficulty comes in when by law or by legal fiction the department seeks to introduce a notional concept as an element of the “real price”. This is particularly important when there is no rule to that effect in the sales tax law. Even under the definition of “turnover” in section 2(i) one has to take into account only the aggregate amount for which goods are bought or sold. It is this aggregate amount which is taxable under section 3 read with section 2(i) of the 1948 Act.”

Accordingly, the Hon’ble Supreme Court has drawn the conclusion in para 19 as under:

“U.P. Trade Tax Act, 1948 is a self-contained code for levy of tax on sale or purchase of goods in Uttar Pradesh. Clause (bb) of section 2 defines the expression “trade tax” to mean a tax payable under the Act. Clause (h) of section 2 defines the expression “sale” to include transfer of the right to use any goods for any purpose for cash or deferred payment or other valuable with section 3F of the 1948 Act. Section 3, inter alia, provides that every dealer shall for each assessment year pay a tax at the rates provided under section 3A, section 3D or section 3H on his turnover of sales or purchases or both, as the case may be, which shall be determined in such manner as may be prescribed. Section 3F provides for tax on transfer of right to use any goods or goods involved in execution of works contract. The definition of “sale” in section 2(h) is in two parts. The first part covers the normal sale and the second part covers deemed sales. In the present case, we are concerned with sale of auto components to the buyer. It is a normal sale. The aggregate amount for which these auto parts/components are sold constitutes the turnover relating to such sales within the meaning of turnover in section 2(i). Therefore, it is on such turnover that liability of tax under section 3 of the 1948 Act has to be determined. Therefore, sales tax or trade tax under the 1948 Act is leviable on sale, whether actual or deemed, and for every sale there has to be a consideration. On the other hand, excise duty is a levy on a taxable event of “manufacture” and it is calculated on the “value” of manufactured goods. Excise duty is not concerned with ownership or sale. The liability under the excise law is event-based and irrespective of whether the goods are sold or captively consumed. Under the excise law, the liability is there even when the manufacturer is not the owner of raw material or finished goods (as in the case of job workers). Excise duty, therefore, is independent of ownership (see: Ujagar Prints vs. Union of India [1989] 3 SCC 488(1)). Therefore, for sales tax purposes, what has to be taken into account is the consideration for transfer of property in goods from the seller to the buyer. For this purpose, tax is to be levied on the agreed consideration for transfer of property in the goods and in such a case cost of manufacture is irrelevant. As compared to the sales tax law, the scheme of levy of excise duty is totally different. For excise duty purposes, transfer of property in goods or ownership is irrelevant. As stated, excise duty is a duty on manufacture. The provisions relating to measure (section 4 of 1944 Act read with the Excise Valuation Rules, 2000) aim at taking into consideration all items of costs of manufacture and all expenses which lead to value addition to be taken into account and for that purpose rule 6 makes a deeming provision by providing for notional additions.

Such deeming fictions and notional additions in excise law are totally irrelevant for sales tax purposes. Therefore, in any event, these notional additions cannot be read into clause 5.1 and clause 5.2 of the general agreement for purchase of parts dated July 31, 1997.”

Conclusion
Thus, the legal position that gets settled is that for sales tax purpose the parameters about ‘sale price’ are different. it is the actual amount, received from the buyer, that is relevant and not the notional value, if any. There may be number of such similar situations like supply of parts to be incorporated in the goods to be ultimately supplied to the buyers. In such cases also the value of such parts may be considered for levy of excise duty, but it cannot form part of sale price for sales tax purpose, as there is no receipt of such notional value from buyer. The above judgment will, therefore, serve as a good indicator for deciding the ‘sale price’.

shailesh.kwebmaker

Professional Services vis-à-vis works contract

Introduction
The issue about nature of transaction as to whether it is sale, service or works contract, is always debatable. This is because there are no pre-set guidelines about deciding the nature of transaction, as to whether sale, service or works contract. There are a number of judgments from various forums but still the issue has remained unresolved.

Constitutional amendment
By the 46th amendment, works contract transactions were made taxable under sales tax by insertion of Clause (29A) in Article 366 of the Constitution of India. Thereafter, the issue of deciding the nature of transaction has become much more complicated. Prior to above amendment, there were normally two types of transactions, i.e., normal sale or works contract. Since works contract was not taxable, no further demarcation used to be made. After the amendment, works contract transactions are taxable. However, all the transactions involving goods cannot become taxable works contract transactions under sales tax laws. In other words, if it can be substantiated that if in a transaction, goods are used, but such use of goods is only incidental to providing service and that the said use is not as sale of material itself, then the transaction can be classified as a transaction for rending service, not liable to tax under the sales tax laws. Therefore, after the amendment, in addition to classifying the transaction as works contract, the further classification can be made as taxable works contract under sales tax laws and non taxable transaction (involving use of goods), but which can be termed as service transaction.

Case study
Reference can be made to the judgment in case of Dr. Hemendra Surana vs. State of Rajasthan (90 STC 251)(Raj). In this case the appellant, a doctor by profession, took an X-ray of the patient and gave his report with an X-ray film. The transaction was treated as works contract by sales tax authorities, whereas the Hon. High Court held that it is not a works contract. It was held as ‘service transaction’ implying that transfer of X-ray film is incidental to professional services.

In the case of Bharat Sanchar Nigam Ltd. (145 STC 91), the Hon’ble Supreme Court discussed about deciding nature of sale vis-à-vis works contract, service transaction. The relevant observations are in para 46 which are reproduced below.

“46.. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley’s case [1958] 9 STC 353 (SC), namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29A), 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 the 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 as to what is “the substance of the contract”. We will, for the want of a better phrase, call this the dominant nature test.”

In light of above, one can look into the intention of parties, the scope of work and decide the nature of transaction. The ‘dominant nature test’ was evolved by the Hon’ble Supreme Court in the BSNL judgement.

Judgment of Larger Bench in case of M/s Kone Elevators (71 VST 1)
In this case, the Hon’ble Larger Bench (5 judges) of the Supreme Court has discussed about nature of transaction of installation of lift. The judgment is by majority of four judges to one judge. The minority judgment has confirmed the original judgment that supply and installation of the lift is ‘sale’.

However, the majority judgment of four judges has held that the lift installation transaction is a ‘works contract.’ Therefore, the binding judgment will be of the majority and transaction of installation of lift will be considered as ‘works contract.’

The Hon’ble Supreme Court, in this judgment, has discussed the entire historical background of works contract transaction. And after making observations about the legal position, the Hon’ble Supreme Court turned to facts of the case.

As per the larger bench, in case of lift, the lift comes into existence on installation. Therefore, the Larger Bench has considered service part as also equally important and hence lift installation transaction is held to be a composite transaction of sale and service, i.e., works contract. This position is clear from the paragraph reproduced below.

“63. Considered on the touchstone of the aforesaid two Constitution Bench decisions, we are of the convinced opinion that the principles stated in Larsen and Toubro (supra) as reproduced by us hereinabove, do correctly enunciate the legal position. Therefore, “the dominant nature test” or “overwhelming component test” or “the degree of labour and service test”are really not applicable. If the contract is a composite one which falls under the definition of works contracts as engrafted under clause (29A)(b) of Article 366 of the Constitution, the incidental part as regards labour and service pales into total insignificance for the purpose of determining the nature of the contract.

64. Coming back to Kone Elevators (supra), it is perceivable that the three-Judge Bench has referred to the statutory provisions of the 1957 Act and thereafter referred to the decision in Hindustan Shipyard Ltd. (supra), and has further taken note of the customers’ obligation to do the civil construction and the time schedule for delivery and thereafter proceeded to state about the major component facet and how the skill and labour employed for converting the main components into the end product was only incidental and arrived at the conclusion that it was a contract for sale. The principal logic applied, i.e., the incidental facet of labour and service, according to us, is not correct. It may be noted here that in all the cases that have been brought before us, there is a composite contract for the purchase and installation of the lift. The price quoted is a composite one for both. As has been held by the High Court of Bombay in Otis Elevator (supra), various technical aspects go into the installation of the lift. There has to be a safety device. In certain States, it is controlled by the legislative enactment and the rules. In certain States, it is not, but the fact remains that a lift is installed on certain norms and parameters keeping in view numerous factors. The installation requires considerable skill and experience. The labour and service element is obvious. What has been taken note of in Kone Elevators (supra) is that the company had brochures for various types of lifts and one is required to place order, regard being had to the building, and also make certain preparatory work. But it is not in dispute that the preparatory work has to be done taking into consideration as to how the lift is going to be attached to the building. The nature of the contracts clearly exposit that they are contracts for supply and installation of the lift where labour and service element is involved. Individually manufactured goods such as lift car, motors, ropes, rails, etc., are the components of the lift which are eventually installed at the site for the lift to operate in the building. In constitutional terms, it is transfer either in goods or some other form. In fact, after the goods are assembled and installed with skill and labour at the site, it becomes a permanent fixture of the building. Involvement of the skill has been elaborately dealt with by the High Court of Bombay in Otis Elevator (supra) and the factual position is undisputable and irrespective of whether installation is regulated by statutory law or not, the result would be the same. We may hasten to add that this position is stated in respect of a composite contract which requires the contractor to install a lift in a building. It is necessary to state here that if there are two contracts, namely, purchase of the components of the lift from a dealer, it would be a contract for sale and similarly, if separate contract is entered into for installation, that would be a contract for labour and service. But, a pregnant one, once there is a composite contract for supply and installation, it has to be treated as a works contract, for it is not a sale of goods/chattel simpliciter. It is not chattel sold as chattel or, for that matter, a chattel being attached to another chattel. Therefore, it would not be appropriate to term it as a contract for sale on the bedrock that the components are brought to the site, i.e., building, and prepared for delivery. The conclusion, as has been reached in Kone Elevators (supra), is based on the bedrock of incidental service for delivery. It would not be legally correct to make such a distinction in respect of lift, for the contract itself profoundly speaks of obligation to supply goods and materials as well as installation of the lift which obviously conveys performance of labour and service. Hence, the fundamental characteristics of works contract are satisfied. Thus analysed, we conclude and hold that the decision rendered in Kone Elevators (supra) does not correctly lay down the law and it is, accordingly, overruled.”

It can be seen that, ultimately the Hon’ble Supreme Court has decided the issue on the factual position.

OUTCOME
As per above judgment, the dominant nature test etc.,
are irrelevant. It appears that the basic nature of the transaction is required to be seen and if it is works contract then the dominant nature test or overwhelming component test etc., are not relevant. Thus, one is again in a dilemma about deciding nature of taxable works contract transaction vis-à-vis service transaction, where some materials may be involved.

By virtue of BSNL decision, dominant nature test could have been applied. In fact, in this case the Hon’ble Supreme Court has observed that doctors, lawyers cannot be liable to tax as the basic nature of transaction is rendering service, though some goods may be involved and transferred. In the judgment of Kone Elevators, the Hon’ble Supreme Court has observed that the dominant nature test is not relevant. Thus, someone may take a view that the doctors and lawyers can also be liable, as the service nature of transaction is not relevant.

This will be an extreme view, which cannot be justified. Though, the dominant nature test is not relevant, still the issue will arise whether services of doctors and lawyers can be considered to be works contract. We have to look into the basic nature of transaction to decide whether it is a works contract? But as discussed, the position has become more fluid and the issue of above nature may crop up. In fact, this is the guidance expected from the judicial pronouncements from the Hon’ble Supreme Court. In any case, in light of direct observations of the Supreme Court in case of BSNL, it can be said that, the services of doctors and lawyers are still out of purview of sales tax laws.

In fact in recent judgment in case of International Hospital Pvt. Ltd. (71 VST 139)(All), the Hon. Allahabad High Court has held that use of stents and valves in heart procedure of patient at hospital is not works contract. However, there can be contrary judgment and the situation will remain uncertain. In above judgment of the Hon. Allahabad High Court itself, there is reporting of contrary judgment of the Kerala High Court in case of Aswini Hospital Pvt. Ltd. (51 NTN 29)(Ker), wherein the hospital is held as liable to works contract tax.

CONCLUSION
In case of International Hospital Pvt. Ltd., the judgment of the Supreme Court in Kone Elevators, i.e., (71 VST 1) was not available. Therefore, one may be tempted to say that the above judgment may require reconsideration in light of above judgment in case of Kone Elevators. However, it appears that the judgment in case of International Hospital Pvt. Ltd., will still hold good as the same is based on basic nature of transaction and will be saved even by judgment of Kone Elevators. In the future, reconfirmation of above judgment of the Allahabad High Court will certainly helpful in deciding correct nature of transaction, more particularly the service transaction where some material is involved in the rending of service.

shailesh.kwebmaker

Branch transfer vis-à-vis dispatch against estimated demand

Introduction
In the last issue of BCAJ, the issues arising in relation to branch transfer vis-à-vis estimated demand from the customer (also referred to as standing order) was discussed. The judgment of Hon. Tribunal in case of Ina Bearing India Pvt. Ltd. vs. State of Maharashtra (VAT APPEAL No.20 of 2010, dated 25/2/2014) was analyzed.

In continuation of that discussion we now analyse a judgment on similar issue by the Central Sales Tax Appellate Authority (CSTAA). The said authority has analysed legal position in detail and has given observations which will be useful in deciding correct nature of branch transfer vis-à-vis interstate sale.

Judgment in case of Indian Oil Corporation Ltd. vs. State of Haryana (72 VST 1)(CSTAA-New Delhi).

The facts leading to the litigation as narrated by the CSTAA are as under:

“The appellant, a Central Government public sector undertaking, was engaged in the business of refining, distribution, marketing and sale of petroleum products. In pursuit of its obligation to maintain uninterrupted supply of petroleum products, storage points were set up across the country to cater to the needs of various markets/ consumers including general public. The appellant made supplies of aviation turbine fuel to the Air Force and the Army at various locations outside the State under contract for supply by first branch transferring aviation turbine fuel to its bulk petroleum installations, which were large storage facilities at Air Force stations and then making supplies to aircrafts on demand by designated officers. The assessing officer rejected the claim of stock transfer by the appellant. By an assessment order passed pursuant to an order of remand in appeal, the claim of stock transfer of aviation turbine fuel was allowed in respect of sale to private airlines at the receiving locations and rejected in respect of sale to the Air Force and the Army. An appeal against this assessment order was dismissed as not maintainable. An appeal before the Tribunal was dismissed by a majority of two Members, out of the three Members’ Bench. The minority view was that the levy of Central Sales Tax in respect of supplies to the Air Force at various locations outside State was bad in law but the majority held that the levy was correct. On appeal, to the Central Sales Tax Appellate Authority, by the appellant contending that the supply order was only confined to quality and pricing of the product and there was no obligation upon the Air Force to purchase any particular quantity of the product from the appellant-corporation as the supply was only to be made on a requirement placed by designated officers and the payment was only to be made for such supply:”

Thus, there was dispatch of goods for meeting requirement of customer and there was over all contract about rate and quality etc. However, there was no obligation on the buyer to purchase particular quantity. The buyer used to purchase as per his requirement from time to time. Under such circumstances the learned CSTAA observed that contract is in the nature of standing order.

After reproducing section 3 of the CST Act, the learned CSTAA has observed as under;

“A perusal of the provisions, extracted above, shows that it raises a presumption of law and that is—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 . . . (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. For purposes of clause (b) of section 3, Explanation I says that where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.

Explanation 2 deals with a situation where the movement of goods commences in one State and terminates in the same State but in the course of movement it passes through another State, and enjoins that it should not be treated as a movement of goods from one State to another State.

It would also be relevant to note section 6A of the Act. It provides that if any dealer claims that he is not liable to pay tax under the 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, and not by reason of sale, then the burden of proving that the movement of goods was so occasioned shall be on the dealer. It also provides the mode of discharge of that burden of proof. To discharge the burden the dealer has to furnish to the assessing authority, within the prescribed time, a declaration duly filled and signed by the principal officer of the other place of business, for his agent or principal, containing the prescribed particulars in the prescribed form obtained from the prescribed authority, along with the evidence of dispatch of such goods. On production of such a declaration, if the assessing authority is satisfied, after making such enquiry as he may consider necessary, that the particulars contained in the declaration furnished by the dealer are true, he is authorized, either at the time of, or at any time before, the assessment of the tax payable by the dealer under the Act, to make an order to that effect and on his so doing, the movement of the goods, to which the declaration relates, shall be deemed for the purpose of the Act to have been occasioned otherwise than as a result of sale.”

After, observing as above learned CSTAA stated the General principles about branch transfer and interstate sale in following words;

“General principles for determining any transaction, as “inter-State” sale are as follows:

(1) That an inter-State sale takes place when there is movement of goods from one State to another.

(2) That such inter-State movement must be the result of a covenant, express or implied in the contract of sale or as an incident of the contract.

(3) That such a covenant need not be specified in the contract itself, and it would be enough if the movement was in pursuance of and incidental to the contract of sale.

(4) That there should be a conceivable link between a contract of sale and the movement of goods from one State to another.

Following factors are necessary to constitute a branchtransfer:

(i) The branch office looks to and estimates the bulk requirements of the area falling in its circle.
(ii) It requires the head office/terminal to supply to it such estimated bulk quantities.
(iii) The head office/terminal sends the quantity accordingly from time to time to meet out the said requirement of its branch office.
(iv)The appropriation of goods to customers takes places in the branch office only.
(v) The branch office has always a choice to supply/sell goods in the branch which means that it has the option of diversion of goods.
(vi)The movement of goods in case of “branch transfers” is from head office/terminal to the branch office and there is no appropriation of goods to a particular customer at the time of such movement from head office.”

Thus, certain principles are now available to distinguish between branch transfer and interstate sale. We hope that it will be useful for future guidance.

Conclusion
Thus, though
the
issue about branch transfer and
interstate sale largely depends
upon facts of each case, the above guidelines will
certainly help in determining the nature of transaction. the overall
legal position appears
is
that though dispatch may be in relation to demand from customer, if there is no obligation on the buyer
to purchase particular
quantity and the actual ascertainment of the goods to be sold
and delivered is done at the branch,
then there will be branch transfer
and not interstate sale.

The judgment of the Hon. Tribunal cited above is required
to be seen in the light of the above judgment of the Hon. CSTAA.

shailesh.kwebmaker

Branch transfer vis-à-vis dispatch against estimated demand Introduction

Interstate sale of goods is liable to tax under the Central Sales Tax Act, 1956 (CST Act). However, there can be certain dispatches from one State to another i.e. branch transfers, etc., which are not be considered as interstate sales. The responsibility to prove, that such dispatches are not interstate sales, is on the ‘transferor’, and amongst others, the transferor has to obtain ‘F’ form from the transferee branch. It is also a legal position that in spite of such ‘F’ form being produced, the authorities are entitled to go beyond the forms and find out the real cause of dispatch. If it is established that such dispatch is due to pre-existing sale order then in spite of ‘F’ form being produced, it can be disallowed and subjected to tax under the CST Act. The disputes on this aspect are very intricate.

It is possible that in respect of standard goods, the dealer may receive tentative requirement for future period. These documents are normally referred to as rate contracts. The dealer stocks the goods in respective states and gives delivery upon receiving concrete delivery requirement. So, actual ascertainment takes place in such state. However, the dealers while sending the goods in lots, may refer to number of orders received as rate contracts. There are judgments on both the sides stating that such a transaction may or may not amount to branch transfer. Hon’ble Maharashtra Sales Tax Tribunal has recently decided such issue in the case of M/s. Ina Bearing India Pvt. Ltd. vs. State of Maharashtra (VAT APPEAL No.20 of 2010, dated 25/2/2014). The brief facts, as narrated in the judgment are as under;

(I) The appellant regularly transferred the finished goods from its Talegaon factory to the branches at Gurgaon in the state of Haryana and at Hosur in the state of Tamilnadu, where the stock of goods was maintained for local as well as inter-state sales. All the branch transfers were declared while filing the returns under the CST Act. The appellant had maintained proper records of all branch transfers such as excise invoices, lorry receipts, etc. The appellant had received all the declarations in Form-F from the branches in respect of the transfer made to the branches.

(II) The purpose for which these branches were opened is as follows :- (a) The customer industries did not want to pile up inventory at their end and wanted the suppliers to deliver the goods to them on daily basis. Therefore, the appellant was compelled to open godowns near to the production base of the customer. In these godowns, they had to keep inventory based on the estimate/ expectation of orders from the customers so that on receipt of customer’s delivery schedule, it could supply goods promptly at a short notice. This required stock transfers to branches in a big way. (b) The customer gave his tentative requirement of quantities based on his planned production programme. The customer was at liberty to alter its sourcing pattern and delivery schedule without any liability on itself and therefore, though the supplier undertook production and transfers goods to his godown/branch, it was still not sure of the time when the customers will actually lift such goods. It can be on the next day of arrival of goods at the branch or it can be even after three months or so. This uncertainty of final sales to the customer made it necessary for the appellant to have the goods in stock in the godowns at the branches for meeting the delivery schedule decided by the customer.

(III) The appellant effected the transfers of bearings to its branches and sales of bearing so transferred at branches as follows:-(a)The appellant made planning and production plan based on the market forecast for short/medium term demand for about two or three years. The estimates of market requirements for next six to twelve months based on the trend analysis were used for monthly production plan. The production planning, therefore, started much in advance and at the beginning stage of production planning, the appellant had no idea of customers’ orders. (b)The appellant manufactured according to international standards. These standards specified the outer and internal diameters of the bearing as well as its width or thickness. These basic dimensions and feature remained valid all over the world and the product had very wide range of applications. There were various manufacturers of a single type of bearing and the customer was at liberty to purchase from any of them. In a few cases, such standard products were made more suitable for a range of application as needed by customers and such differentials were denoted by suffix or prefix with the basic bearing number. Even in such cases, basic dimension and technical features remained as per the international standards. Bearings produced by the appellant could be sold anywhere in India to any branch /any dealer/customer depending on his requirements. (c) The appellant sent the goods to its own branch in big lots under the cover of branch transfer note and lorry receipts which were made out in the name of branch after payment of applicable excise duty. (d) The branch had to maintain sufficient stock of all the varieties of bearings, which would possibly be required by the customer. Till the customer approached the branch for purchase of goods, the branch or the appellant had no information about customer’s exact order with quantities and delivery schedules. (e) The branch office sold the goods to customer from its stock on hand as and when required against the customer order/schedule, under the cover of sales invoice. The branch charges applicable local sales tax of the respective State in the sales invoice. The branch issued excise invoice to its buyer so that the buyer got the credit of excise duty paid at the time of branch transfer from its manufacturing unit at Talegaon in Pune District. (f) The appellant, after transferring the goods to branches in the State, as above, had affected local as well as interstate sales at the branches and had paid the local tax and central sales tax in the respective States. The appellant had been assessed for Gurgaon branch in Haryana for the Financial Year 2006-2007 and for the Hosur branch in Tamil Nadu for the Financial Year 2004-2005.

Based on above facts, the assessing authority observed as under and considered the transfers as interstate sales.

“The goods are dispatched against the firm purchase orders from the customers outside the State of Maharashtra. On the dispatch documents the customer’s part number is mentioned. Specific goods are meant for specific customers. The dispatch and the sale are so related that the contract of sale could not be executed without dispatching the goods from the State of Maharashtra. The dispatches from the State of Maharashtra are for sale to the outside customers. Thus, the claim of the dealer that the dispatch is otherwise than by way of sale cannot be entertained in view of the clear facts and circumstances of the case and also having regard to the law well settled in this regard at the level of the Apex Court of India.”

The Hon’ble Tribunal after discussing the issue, made following observations;

“(iv) The appellant has also furnished before us a copy of purchase order placed by m/s. maruti udyog limited, Gurgaon at page no.62 of the compilation, a copy of purchase order amendment by m/s. maruti udyog limited at page no.63 of the compilation, the copies of delivery schedule placed by m/s. maruti udyog limited, Gurgaon placed at page nos.64 to 67 of the compilation, the copies of sales/excise invoices raised by the appellant’s Gurgaon branch on m/s. maruti udyog limited, placed at page nos. 68 to 83 of the compilation, the copies of stock transfer invoices with the copies of lorry receipts placed at page nos.84 to 87 of the compilation and a copy of finished goods stock register placed at page nos. 88 to 121 of the compilation. The details necessary for the purpose of appreciation of the issue as culled out of the documents are as follows;

Sr.No

2. Purchase order No. & Date

3. Part No. & Design

4. Stock Transfer/ Excise
Invoice No. & Date issued on the gurgaon Branch

5. Transferee Branch

6. Excise Invoice No.
issued by gurgaon Branch

7. Customer/ Buyer’s Name

1306582 Dt.11/10/03

KF-217084-HLA-

302155
Dt.22/02/06

Gurgaon

418004

M/s.Maruti
Udyog

09263M25053

Dt.03/04/06

Limited, Gurgaon

1306582 Dt.11/10/03

KF-217084-HLA-

302155
Dt.22/02/06

Gurgaon

418005

M/s.Maruti
Udyog

09263M25053

Dt.03/04/06

Limited, Gurgaon

A perusal of documents namely purchase order, stock transfer invoices, excise invoices being sale invoices raised by the appellant’s Gurgaon branch on the customer m/s. maruti udyog limited, Gurgaon shows that all the sales effected to m/s. maruti udyog limited, Gurgaon, pertains to the purchase order no.1306582 placed by m/s. maruti udyog limited, Gurgaon on 11/10/2003. this is clear from a copy of delivery schedule which is furnished to us. though there are subsequent amendment to the purchase order, the original purchase order is of 11/10/2003. all these stock transfers are affected subsequent to the said purchase order. these transfers can be said to be pursuant to the purchase order with a view to ensuring delivery of the goods to the customer m/s. maruti udyog limited, Gurgaon. the transfers are pursuant to the purchase orders and the goods are delivered subsequently. The impugned transactions, therefore, effected by the appellant to m/s. maruti udyog limited, Gurgaon, by raising sales invoices by Gurgaon branch are interstate sales. the appellant has not furnished before us the documents namely copies of sales invoices in respect of sales affected from 07/04/2006 onwards till 31/03/2007 to m/s. maruti udyog limited. Hence, we are unable to draw any inference in respect of the transactions effected from 07/04/2006 onwards.

(v) Excise invoice dt.30/05/2006 issued by the appellant’s branch at hosur to m/s.tVs motors Co. ltd. in respect of sales of 5600 bearings refers to the purchase order no.100242 placed by tVs motors on the appellant’s branch. the purchase order shows that it is of 31/10/2002, valid for the period 31/10/2002 to 31/03/2015. it is for the goods of the description, “n8010170-roller assy rocker”. the excise invoice dt.30/05/2006 also refers to the corresponding stock transfer/excise invoices nos.400468 dt.28/05/2006 and 400478 dt.27/05/2006 issued by the appellant at pune to its hosur branch. one can infer that the sales of bearings, effected by hosur branch under invoice dt.30/05/2006 are in compliance with the purchase order dt.31/03/2002, which were received by the branch under stock invoice/excise invoice dt.28/05/2006 and 27/05/2006 issued by the appellant’s branch at pune. the movement of the goods effected by the appellant’s branch at pune to its branch at hosur in tamil nadu under the above stock transfer invoices and sold subsequently pursuant to the order dt.31/10/2002 can be said to have been occasioned pursuant to the earlier purchase order dt.31/10/2002 and are therefore interstate sales.” hon’ble tribunal also referred to following judgments;

a)   Union of india and another V/s. K.G.Khosla and Co. ltd. (43 stC 457)
b)   Sahney steel and press Works ltd. and another V/s. Commercial Tax Officer And Others (60 STC 301),
c)   Hyderabad engineering industries V/s. state of andhra pradesh (39 Vst 257)
d)   Tata engineering and locomotive Co. ltd. V/s. assistant    Commissioner    of    Commercial   taxes, jamshedpur and another        (26   stC   354),   and from this judgment, following para is also reproduced.

“Instead of looking into each transaction in order to find out whether a completed contract of sale had taken place, which could be brought to tax only if the movement of vehicles from jamshedpur had been occasioned under a covenant or incident of that contract, the assistant Commissioner wrongly based his order on mere generalities. the assistant Commissioner, on whom the duty lay of assessing the tax in accordance with law, was bound to examine each individual transaction and then decide whether it constituted an inter-state sale exigible to tax under the provisions of the act”.

Thus, the hon’ble tribunal considered such dispatches as interstate sales. however, it also observed that each transaction is required to be examined separately and therefore, remanded the matter back to lower authority.

Conclusion
Such an uncertain position may cause several difficulties for dealers. against estimated requirements, the dealers are required to stock the goods in other states. There may be reference to the documents for such estimated requirements and even for logistic purposes, there may be reference of such numbers on dispatch documents. however, there are a number of factors on account of which goods are not sold or are sold after long interval. There is no firm order in advance. The actual sale takes place only when ascertainment is done after receipt of firm requirement from the buyer. Therefore, merely because the purchase order number is quoted, it cannot be said that there is firm order. Therefore, there is certainly the other view that such dispatches cannot be considered as interstate sales. however, these are all judgment based facts and dealers are required to take proper precaution in such kind of transactions.

shailesh.kwebmaker

Branch Transfer, Inter State Sale vis-àvis Dispatch of Semi-finished Goods

Introduction
Under Central Sales Tax Act, 1956 (CST Act), the transaction of ‘sale’ (inter- state sale) is liable to tax. A transaction of sale becomes inter-state sale, if because of such sale, there is movement of goods from one State to another State. In other words, if there is link between inter-state movement of goods and the pre-agreed sale between the transferor (seller) and the buyer then there will be inter-state sale.

However, there can be inter-state movement of goods (otherwise than an agreement to sale), like; when goods are sent from one branch in one State to another branch in other State of the same entity or to the agent or principal as the case may be (commonly known as ‘consignment transfer/branch transfer’).

There is a lot of litigation about claim of branch transfer vis-à-vis inter-state sale. The transferor branch may be transferring goods to another branch for compliance of requirement of a local customer of the transferee branch. Whether there is conceivable link between dispatch to branch and ultimate sale to the local customer will decide the nature of transaction. If there is conceivable link then the branch transfer will amount to inter-state sale. If there is no such conceivable link, then it will not amount to inter state sale and claim of branch transfer will remain allowable.

Whether there is conceivable link between branch transfer and ultimate sale will depend upon facts of each case. Therefore, there can not be any general ratio for deciding the nature of transaction.

Dispatch of Semi-finished goods
An interesting issue arose before Maharashtra Sales Tax Tribunal (MSTT) in case of Multi Flex Lami Prints Ltd. (Appeal No. 61 of 2008 dated 29.7.2013).

Facts were that the appellant/dealer was engaged in the activity of supply of packaging pouches. The packing pouches were to be supplied to one particular customer and they were printed accordingly as per his specifications. Appellant had manufacturing unit at Mahad in Maharashtra. There, on the raw materials, processes like colour separation, cylinder making, printing and lamination were carried on. After above processes, the processed goods were sent to Silvassa the unit. In the Silvassa unit, processes like slitting and pouching were done. Thereafter the pouches were supplied to the customers.

In the assessment, the branch transfer claim was allowed. However, in revision proceedings, the said claim was disallowed holding that the transfer is interstate sale. The fact of manufacturing the goods as per specification of customer in Mahad and dispatch to Silvassa was considered as the determinative factor for holding the transfer as inter state sale.

Judgment of Hon’ble Tribunal
Before the Hon’ble Tribunal, several arguments about legality of the revision order were taken. However, Hon’ble Tribunal considered the revision action as valid. On merits, Hon’ble Tribunal held that the revision is not correct. The observations of Hon’ble Tribunal are reproduced below:

“It was explained in the said letter that the processes, namely colour separation, cylinder making, printing and lamination had been carried out at the factory in Mahad and thereafter, the laminated films were dispatched to Silvassa Unit of the appellant for further processing such as slitting and pouching. It was then explained by the appellant to the revising Officer that the goods sent to Silvassa Unit were Semi finished goods and thereafter they were slit according to the specification of width given by the customer. The slit films were then stretch-wrapped and packed, which is known as primary packing. The said film rolls were thereafter put in corrugated boxes which are known as secondary packing. It was also explained by the appellant to the revising Officer that in case the customer requires the material in pouch form, the laminated/slitted films is converted into pouches of types/sizes as per specification of the customers and after quality check and packing they are dispatched to the customer. It also appears that it was explained by the appellant to the revising officer that, although the goods become identifiable to a particular customer at the time of leaving Mahad Unit but in a Semi finished condition. It was explained by the appellant that the semi finished goods received by the Silvassa Unit were subjected to further processing of slitting and pouching at Silvassa unit and were thereafter dispatched to the customers at various places outside Silvassa in finished form. It would appear that it was the case of the appellant before the revising officer that the goods sent to the branch were not delivered/ sold as such by the Silvassa branch, but they were different goods from the goods sent to the Silvassa branch. A perusal of revision order shows that the revising officer had not controverted this factual submission of the appellant and thus accepted the contention of the appellant that the goods sent by the appellant to the Silvassa unit were the goods manufactured up to lamination stage and further process such as slitting and pouching were done at Silvassa unit and the goods ultimately delivered to the buyers outside Silvassa were after slitting and pouching made at Silvassa. In support of the claim that slitting and pouching of laminated and printed packaging film amounts to manufacturing activity, the appellant has relied upon the judgment dated 24th September 2012 of the Bombay High Court in Income Tax Appeal No.741 of 2010. The revenue has however relied upon the judgment of the Delhi High Court in the case of Faridabad Iron and Steel Traders Association v/s. Union of India in Civil Writ Petition Nos. 7595 of 2001 and 94 of 2002 decided on 21-11-2003 to support it’s case that slitting of laminated films does not amount to manufacture. The concept of manufacture envisages that the processes to which the goods are subjected to should not only bring about change in the goods but the change should be such that the goods after subjecting to processes emerge as a different commercial commodity. In Faridabad Iron and Steel Traders Association, it was held by the Delhi High Court that mere cutting or slitting of Steel Sheet does not amount to manufacture because the identity of the product remains unchanged. We are of the view that in the context of the facts of the present case it would be most appropriate to decide the issue relying upon the judgment of the Bombay High Court in Income Tax Appeal No.741 of 2010. We agree with the appellant that the nature of goods actually delivered to the buyers by Silvassa unit are different from the goods sent by the appellant’s factory at Mahad to it’s Silvassa Unit. This fact is borne out from the description in the stock transfer invoices raised by the appellant on its Silvassa branch and the sales invoices issued by the Silvassa branch to the buyers.”

It is further observed as under;
“In the present appeal before us, the goods manufactured and ultimately delivered to the customer by the Silvassa branch of the appellant are made as per the specifications of the customer. Manufacturing involves the processes namely, colour separation, Cylinder making, printing, lamination, slitting and pouching. Processes upto lamination stage are done at Mahad factory in Maharashtra. The goods manufactured upto lamination stages are sent to Silvassa branch. But they are not delivered to the customer in the form in which they are received by Silvassa branch because the goods in the form in which they are received by Silvassa branch are not ready to be delivered/sold to the customers as per their requirement/orders. The goods received by Silvassa branch are subjected to further processing of slitting and pouching so as to make them appropriate for delivery to the customer as per his specification. Slitting and pouching is done at Silvassa. Thus, it is clear that the goods delivered by Silvassa branch of the appellant to the customer is a different commercial commodity from the goods sent by Mahad factory of the appellant to Silvassa branch and therefore it is difficult to hold that there is an inter-State sale of the same goods which were manufactured by the Mahad factory of the appellant and dispatched to Silvassa branch. In the case of Bharat Electronics Ltd., (46 VST179), The petitioner had manufactured night vision devices at its Machilipatnam Unit which were transferred to other units of the petitioner outside the State to be incorporated in the equipment to be manufactured at the other units which were eventually sold there from to end customers. It was held by the Andhra Pradesh High Court that it is only if the goods which move from one State to another are sold as they are would the question of such transfer of goods attracting levy of tax under the C.S.T Act as an inter-state sale arise.”

Conclusion
The above judgment will be useful for deciding the nature of transaction, when there is branch transfer of Semi-finished goods. However, the nature of processes carried out at relevant places is also required to be seen before arriving to conclusion. It is expected that above judgment will provide guidelines.

shailesh.kwebmaker

Sale/Exchange/Works Contract

Introduction
Various types of
transactions take place in a commercial world. A peculiar issue, which
arises is about the status of a transaction where the dealer receives
goods for repair, replaces the same with his own goods and receives his
charges for repair. The old one received from the customer is retained
with him for further replacement after repair. The issue is whether, on
receipt of money from the customer towards the repair charges, the
dealer can be liable to tax under Sales Tax Laws or it can be considered
as transaction of exchange thereby, not liable to Sales Tax or whether
it falls in the category of Works Contract.

Judgment of Hon. M. S. T. Tribunal
The above issue was dealt with by M. S. T. Tribunal in case of Kirloskar Copeland Ltd. (S. A. No. 428 of 2009 dt.18.04.2011).

In
this case, the appellant M/s. Kirloskar Copeland Ltd. was the
manufacturer and seller of compressors used in air-conditioners. It
accepted defective compressors outside the warranty period with certain
fixed repair charges from the customer and replaced them at the option
of the customer with another repaired compressor off the shelf. The
defective compressor was then sent for repairs. The said repaired
compressor was then available for replacement in lieu of the defective
compressor of another customer. The cycle continues on. The repairs
charges received were mentioned in the books as ‘repair charges.’ This
was treated by the Assessing Officer as ‘sale’ of old repaired
compressors under the BST Act, 1959 and levied tax on the same.

The
Tribunal held that in a transaction of cross transfer of property in
the defective compressor received from customer and giving the repaired
compressor off the shelf, there is no consensual agreement of sale
supported by the price or money consideration. Holding this as not a
‘sale’ transaction, the Tribunal set aside tax. Thus, the situation
developed is that such receipt of money is not liable to tax under the
Sales Tax Laws.

The Madras High Court
The Madras High Court had an occasion to deal with a similar issue in Sriram Refrigeration Industries Ltd. vs. State of Tamil Nadu (53 VST 382)(Mad).

The
assessee received defective compressors in its Tamil Nadu office. The
assessee gave him another repaired compressor and also charged repair
charges. The defective compressor was then transferred to the Hydrabad
workshop to repair and keep it in its rolling stock.

The Tamil
Nadu Sales Tax Authorities levied Sales Tax on the same, considering the
transaction as Works Contract. The Tribunal was of the same view and
the Hon. Madras High Court confirmed the above view of the Tribunal.
Thus, confirmed the levy of tax on above transaction as “Works
Contract”.

Recent judgment of the Hon. Bombay High Court
Kirloskar
Copeland Ltd. (S. A. No. 428 of 2009 dt.18.04.2011) A Reference
application was filed before the Tribunal by the Department to refer the
question of law to the Hon. Bombay High Court. The Hon. Tribunal
rejected the said application on the ground that no question of law
arises as the issue is decided based on precedent. The Department
thereafter filed a Reference Application before the Hon. Bombay High
Court. The said application has now been decided. (Sales Tax application No. 10 of 2012 dated 8th May, 2014). The Hon. Bombay High Court has confirmed the view of the Tribunal that in the given circumstances there is no sale.

The
reasoning of the Hon. Bombay High court is as under: “11. In the
present case, we find that there is no sale at all. As stated earlier, a
defective compressor is brought by the customer of the Respondent to
its Sales and Service Office. Thereafter, the customer is informed about
the normal time of repairs which is approximately 60 days. At that
time, on payment of the repair charges, the customer is given an option
either to wait for 60 days or to take another repaired compressor off
the shelf of the Respondent. If the customer opts for the latter, then a
delivery note cum debit advice as well as a repaired compressor is
handed over to the customer. It is therefore evident that there is no
sale of the repaired compressor. All that is done is that on payment of
repair charges, the customer is given an option not to wait for 60 days
and instead take another second hand repaired compressor immediately in
lieu of the defective compressor.

12. The MSTT, after
considering all the evidence in this regard, came to the conclusion that
in the present case, there was a transaction of cross transfer of
property between the defective compressor and the repaired compressor
and therefore, there was no consensual agreement of sale supported by
price or other monetary consideration. We are in full agreement with the
findings of the MSTT on this aspect. What is paid is only the repair
charges and not the price for purchasing the repaired compressor. This
is clear from the fact that even if the customer opted not to take a
repaired compressor off the shelf of the Respondent, it would still have
to pay the same repair charges for repairing its own compressor and
wait for 60 days to receive the same from the Respondent, after repairs.
This puts it beyond the realm of doubt that what is charged to the
customer by the Respondent is only repair charges and not a price for
the sale of the repaired compressor.

13. Ms. Helekar, learned
counsel appearing on behalf of the applicant submitted that repair
charges are fixed and uniform all over India. According to her,
therefore, that was the price at which the repaired compressor was being
sold by the Respondent to the customer.

14. We do not agree. If
the repair charges were really the price of the sale of the repaired
compressor, there would be no question of the customer having to return
his defective compressor and thereafter take the repaired compressor off
the shelf of the Respondent. In the scenario suggested by Ms. Helekar,
all that the customer has to do is simply pay the repair charges and
take the repaired compressor off the shelf of the Respondent. That is
not the case. It is an admitted position that the defective compressor
is handed over to the Respondent along with the repair charges and in
lieu thereof the customer is handed over a repaired compressor. We
therefore find no merit in this contention.”

Thus, the situation
which arises now is that, though in Tamil Nadu, a similar transaction
may be Works Contract in Maharashtra. It will not be liable to tax.

Conclusion
In light of different judgments of two different high courts, the issue will remain debatable.

As
per the reasoning given by the Hon. Bombay High Court, the judgment of
the Tribunal cited above will be correct to the extent that it is not a
‘sale.’ However, the position still remains is that whether it may be
liable to tax as ‘Works Contract’ as per the Madras High Court judgment.
It may be noted that before the Hon. Bombay High Court, the above
Madras High Court judgment was not cited as well as this was not a point
of argument. Therefore, so far as the MVAT Act is concerned, the issue
will still remain open, as Works Contract sale is also covered in the
MVAT Act, 2002.

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shailesh.kwebmaker

Liability of Builders and Developers vis-à-vis New Rules

Introduction
Whether builders are liable to tax under MVAT Act, 2002 has been a burning issue since 20th June, 2006. The matter has been ultimately decided by the Hon’ble Supreme Court by way of judgment in case of Larsen & Toubro & others (65 VST 1). In the said judgment, the Hon’ble Supreme Court observed that the tax can be levied from the stage of agreement and thereafter. The Hon’ble Supreme Court also observed that the tax can be levied on the value of the goods only and no tax can be levied on the value of immovable property. So far as Maharashtra is concerned Hon’ble Supreme Court has directed to align the provisions in tune with above observations.

Amendment to MVAT Rules, 2005
As a follow-up to the above Supreme Court judgment, the Government of Maharashtra issued notification dated 29-01-2014 by which certain rules are amended. The short gist of amended rules is as under:

i) In Rule 58(1) an amendment is made so as to provide that the deduction as per the table will be available after the reduction of land value from the contract price.

ii) Rule 58(1A), which is related to the calculation of land value, is amended and a proviso is added. It has now been provided that if a higher value is proved before the Department of Town Planning and Valuation then the dealer can take that higher value instead of ready reckoner value.

iii) Rule 58(1B) is inserted to provide that if the agreement is entered into where some work is already done, then the value of the goods, after taking deduction for labour and land, will be as per the following calculation:

(b) For determining the value of goods as per the above Table, it shall be necessary for the dealer to furnish a certificate from the Local or Planning Authority certifying, the date of completion of the stage referred above and where such authority does not have a procedure for providing such certificate then such certificate from a registered RCC consultant.

(1C) If the dealer fails to establish the stage during which the agreement with the purchaser is entered into then the entire value of goods as determined after deductions under sub-Rules (1) and (1A) from the value of the entire contract, shall be taxable.

Certain issues

In light of the above new rules and the Supreme Court judgment, various issues arise. Some of them are discussed below:

In the above judgment, the Hon’ble Supreme Court held that the Constitution of amendment bringing works contract in the sales tax net did not prohibit that if in addition to labour and material, if a third element like land is involved, there cannot be a taxable works contract. In other words, the Supreme Court has decided that even if in a contract, a third element like immovable property is involved, it can still be a taxable works contract under Sales Tax Laws. Accordingly, liability in case of builders can be attracted from the date of amendment in constitution, i.e., 1983, though in Maharashtra it will be enforced from 20th June, 2006.

The other fall out is that the contract with the builder is also to be treated as a normal contract. A normal contract can take place even by a mutual understanding and without a written document. Similarly, in the case of builders, a contract may arise by any action for the effecting transaction, though the actual agreement for sale may be registered subsequently. For example, the builder may issue an allotment letter, though agreement may be registered subsequently. In light of the interpretation made by the Hon’ble Supreme Court, the works contract will take place from the date of allotment letter itself.

An issue may also arise about the deduction for cost of land. In addition to the purchase cost, there are other expenditures like registration fees, TDR purchase cost etc. The issue will be whether, in addition to working as per Rule 58 (1A), such additional expenses will also be allowable. It is to be noted that Rule 58(1A) provides for deduction for probable sale value of the land involved in the contract. The value is to be worked out as per the ready reckoner rate.

Therefore, there cannot be further deductions on account of TDR etc. If at all, because of TDR etc., land value is increasing, the builder will be required to get a certificate from the Department of Town Planning and Valuation. Without such certificate, it will be difficult to get the extra deduction.

An issue may also arise for set-off. Although, tax is payable as per slabs given in Rule 58(1B), i.e., as per the completion stage, there is no provision requiring reduction of set-off in any given proportion. Therefore, as per the Rules that are in force today, the set off will be allowable fully, though tax may be payable on given percentage. To avoid litigation it is better that the department clarifies the above issue at the earliest.

It is also be noted that the builder now becomes a normal dealer. Therefore, he can claim set-off as any normal dealer. As per the normal provisions, set-off is allowable on effecting purchase and entering it in the books. The restrictions and negative list will be operative as applicable to a normal dealer. If Rule 53(6) is not applicable to the builder, he can claim set-off on all purchases. If at all ultimately, part of the premises are sold as immovable property, i.e., after completion of the building/unit in the building, there will still not be any adverse effect on the set off already taken.

As per Rule 58(1B), tax is payable according to the completion stage. One of the issues will be that even if the cost of work completed prior to agreement is higher, the tax will still be payable as per the given percentage. In other words, tax will get paid even on the completed portion.

In case of K. Raheja Development Corporation vs. State of Karnataka (141 STC 168)(SC), the Hon. Supreme Court has observed that if the sale agreement is after completion of the premises, then Sales Tax cannot apply. From the new Rule 58(1B) it appears that even if the building is fully complete, but occupation certificate is not received, the builder will be liable to pay tax on 55% value of the goods. This is contrary to the above judgment delivered by the Supreme Court. Thus, there will be a situation where tax will get attracted on sale of immovable property portion also, because of above mentioned Rule.

This will be unconstitutional. It is expected that an alternative scheme to grant higher deduction, as per completion stage, should be framed based on the records of the builder. Further the taxation after completion of building, but before getting occupation certificate, should be revisited by the Government.

Conclusion
There may be many further issues in respect of the taxation of builders. As per the ordinance dated 03-03-2014, the time limit for assessment for the year 2006-07 for the builders is extended to September, 2015. We hope that before such completion date, the above referred issues will be clarified by the department.

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shailesh.kwebmaker

Film Distribution Rights, Whether Liable to Vat?

Synopsis The authors continuing their coverage of transactions which have been subject of levy of dual taxation of sales tax and service tax, have in this feature discussed about taxability of film distribution rights in light of recent decision of AGS Entertainment Pvt. Ltd.(Mad.). The authors discuss and concur with the views of the Court that in case of temporary transfer of film distribution rights, what is transferred is only the ‘use of the goods i.e. copyright in films’ and not ‘transfer of right to use goods’, so such transaction shall be subject to service tax and not sales tax.

Introduction

The Hon’ble Supreme Court in case of Association of Leasing and Financial Services Companies vs. Union of India & others (2 SCC 352) has observed as under;

“Today, with the technological advancement, there is a very thin line which divides a sale from service.”

In this scenario, it is very difficult to decide as to which tax will apply to the transaction/s i.e., VAT or Service Tax. One such issue arose in respect of film distribution agreements.

The film producers and distributors were under an impression that on their agreements for distribution of films with distributors, as well as between distributors and sub distributors or with theatre owners etc., they are liable to tax under State Value Added Tax Act.

However, Service Tax department also claimed tax on the said transaction under sub-clause (zzzzt) of clause (105) of section 65 as ‘transferring temporarily’ or ‘permitting the use or enjoyment of, any copyright defined in the Copyright Act,1957, except the rights covered under sub-clause (a) of the clause (1) of section 13 of the said act.’

The film producers and distributors challenged the levy of Service Tax before the Hon’ble Madras High Court. The Hon’ble Madras High Court has now delivered judgment in AGS Entertainment Pvt. Ltd. & Others (Writ Petition no. 29398 of 2010 & others dated 26.6.2013.)

Facts
In the Writ Petition, the Hon’ble Madras High Court has raised following issues for its consideration.

“17. Upon consideration of the rival contentions and averments in the Writ Petitions and counter statement, the following points arise for consideration in these Writ Petitions:-

1. Whether the taxable event provided under Section 65(105)(zzzzt) of the Finance Act, 1994 is covered by Article 366 (29A)(d), which is a “deemed sale of goods”?

2. Whether the Petitioners are right in contending that the levy of service tax on “temporary transfer or permitting the use or enjoyment of copyright“ provided u/s. 65(105)(zzzzt) of the Finance Act, 1994 is covered under Entry 54 of List II and whether it amounts to transgression by Parliament into the exclusive domain of the State Legislature?

3. Whether the Petitioners are right in contending that the copyright is goods and transfer of copyright of cinematograph films is only delivery of goods for consideration and is absolute transfer and no service element is involved?

4. Even assuming that there is an element of service involved in the nature of transaction done by the Petitioners, should the dominant intention of the transaction being transfer of goods has to be only taken into consideration?

5. Whether the Petitioners are right in contending that Parliament has no authority to dissect a composite transaction as in the case of the Petitioners and levy service tax?

6. Whether Section 65(105)(zzzzt) levying service tax on the temporary transfer or permitting the use or enjoyment of copyright is ultra vires the Constitution.”

The Hon’ble Madras High Court referred to a number of judgments about validity of levy of Service Tax and levy of tax on deemed sale by way of ‘transfer of right to use goods’. As stated above, the argument of producers was that their agreements were for transfer of right to use goods and not for rendering services. The argument of the department was that allowing temporary use was falling under the service category.

Judgments referred For arriving to the meaning of sale by way of ‘transfer of right to use goods’, amongst others, the Hon’ble Madras High Court referred to the judgment of the Hon’ble Supreme Court in case of 20th Century Finance Corporation Ltd. vs. State of Maharashtra (119 STC 182). Hon’ble High Court quoted the following paragraphs from the above judgment:

“26. Next question that arises for consideration is, where is the taxable event on the transfer of the right to use any goods. Article 366(29-A) (d) empowers the State Legislature to enact law imposing sales tax on the transfer of the right to use goods. The various sub-clauses of clause (29-A) of Article 366 permit the imposition of tax thus: sub-clause (a) on transfer of property in goods; sub-clause (b) on transfer of property in goods; sub-clause (c) on delivery of goods; subclause (d) on transfer of the right to use goods; sub-clause (e) on supply of goods; and sub-clause (f) on supply of services. The words and such transfer, delivery or supply … in the latter portion of clause (29-A), therefore, refer to the words transfer, delivery and supply, as applicable, used in the various sub-clauses. ………..

In our view, therefore, on a plain construction of sub-clause (d) of clause (29-A), the taxable event is the transfer of the right to use the goods regardless of when or whether the goods are delivered for use. What is required is that the goods should be in existence so that they may be used. ……….

27. Article 366(29-A)(d) further shows that levy of tax is not on use of goods but on the transfer of the right to use goods. The right to use goods accrues only on account of the transfer of right. In other words, right to use arises only on the transfer of such a right and unless there is transfer of right, the right to use does not arise. Therefore, it is the transfer which is sine qua non for the right to use any goods. If the goods are available, the transfer of the right to use takes place when the contract in respect thereof is executed. As soon as the contract is executed, the right is vested in the lessee. Thus, the situs of taxable event of such a tax would be the transfer which legally transfers the right to use goods. In other words, if the goods are available irrespective of the fact where the goods are located and a written contract is entered into between the parties, the taxable event on such a deemed sale would be the execution of the contract for the transfer of right to use goods. But in case of an oral or implied transfer of the right to use goods it may be effected by the delivery of the goods..”

Thereafter, High Court referred to the scope of section 65(105)(zzzzt) about ‘temporary transfer’ under Service Tax in para -37 as under;

“37. Section 65(105)(zzzzt) seeks to tax viz., “temporary transfer or permitting the use or enjoyment” of copyright which is a service provided by the producer/distributor/exhibitor. Service Tax is a levy not on the “transfer of right to use the goods” as described under Article 366(29A) sub-clause (d); but on the temporary transfer” or “permitting the use or enjoyment” of the copyright as defined under the Copyright Act, 1957. In the case of Sales Tax Act, there would be “transfer of right to use the goods”. Whereas under the Service Tax Act what is levied is temporary transfer/enjoyment of the goods. The pith and substance of both enactments are totally different. “Temporary transfer” or “permitting the use or enjoyment of the copyright” is not within the State’s exclusive power under Entry 54 of List II. Therefore, there is no merit in the contention that the taxable event provided under Section 65(105) (zzzzt) is covered by Article 366(29A)..”

Regarding nature of transaction about transfer of right to use goods, Hon’ble High Court referred to the judgment in case of B.S.N.L. vs. Union of India (2006)(3 SCC 1) and quoted the following paragraphs.

73. No transfer of right to use:- As held by the Supreme Court in the decision of B.S.N.L. vs. Union of India, (2006) 3 SCC 1, 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 conse-quences 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 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.”

Observations of the High Court about nature of transaction

After referring to various different kinds of agree-ments entered into in the film industry in para-65 & 66, the Hon’ble High Court observed as under;

“65. Even though it was contended that the transaction is between the producer and the distributor and the distributor gets the absolute right over the cinematograph film, in reality, the distributor does not get the absolute rights. The distributor only gets few positive prints or cubes of the picture for the exhibition of the picture in the specified area. In other words, it is a temporary transfer of the copyright or permission to use or enjoyment for the limited period in the specified area. As rightly contended by the respondents, exclusive right of copyright ordinarily vests with the producer of the film. Even in outright assignment, the transfer is not absolute. In the case of a lease, it is for a given period. The levy of tax on any transaction is based on the criterion whether the transfer of right is permanent or temporary. So long as the producer does not fully relinquish his right over the copyright held by him, transfer of the right to use is purely temporary and in those cases, levy of service tax for such transfer of copyright would apply. The Service Provider is the Producer, who is the owner of the Intellectual Property and the service receiver is the person who temporarily gets the right to use the Intellectual Property who is the Distributor and service tax is leviable on such temporary transfer of copyright.

66. Normally, producer of a movie exploits the film in many ways i.e., assigning copyrights to distributor(s) for exhibition in theatres; or the producer himself exhibits the film by engaging the-atres; exploitation of satellite rights, T.V. channels, audio/video, etc. The right given to the distributor is restricted to exploiting the contents of the film through a film/digital format through exhibition in theatres in a specific area and for specified time. Even though the copyright of the film is assigned to a distributor for a specific area for a limited period, the producer reserves his right to exploit the film in other media. So long as the transaction does not amount to sale or permanent transfer, it is only a temporary transfer of copyright or permit its use by another person for a consideration. The Service Provider is the Producer who owns the copyright of the film and Service receiver is the

Distributor who temporarily owns the copyright of the film for consideration.”

In paras 75 & 83 Hon’ble High Court has held as under;

“75. In our opinion, none of these attributes are present in the agreement between the producer and the distributor and the distributor and the theatre owner. Even while the films were in use by the distributor/exhibitor, the same are under the effective control of the producer. The distributor is not free to make use of the same for other works like satellite rights, T.V. Channels, exploitation of song, audio/video, D.V.D. etc., The distributor can-not make use of the film according to his wishes, but there is only temporary transfer or permission to use or enjoyment for consideration as per the terms of the agreement.”

“83. Considering the nature of various arrange-ments between the producer and the distributor, distributor/subdistributor and theatre owner, we are of the view that there is only temporary transfer or permission to use or enjoyment for consideration on certain terms and conditions in a specified area. Irrespective of the arrangement of rights to the distributor to a specific area for a limited period, the producer retains the original copyrights. The sale of goods can be said to have taken place only when the producer relinquishes his right and title over the goods; but when he keeps grip over the goods transferred for temporary use or enjoyment on certain terms and conditions. When the transactions are not sale or deemed sale, the same cannot be brought under Entry 54 of List II or Entry 92A of List I.”

Conclusion

The Hon’ble High Court analysed the nature of transaction of deemed sale in relation to film distribution. It is held that unless there is case of full assignment of the copy right, whereby a producer does not retain with him any right only then can it be liable to VAT. In other words, unless it is a case of permanent assignment of the film as a whole, no liability can be attracted under MVAT Act, 2002. Today in Maharashtra, the VAT authorities are levying VAT on the film distribution agreements, considering the same as transactions of transfer of right to use goods. In light of above judgment, the said levy can be said to be illegal and unjustified. The judgment of the Hon’ble Madras High Court being under Central Enactment, it is binding on authorities in Maharashtra also. As there is no contrary judgment of the jurisdictional High Court, we hope above precedent will be followed.

shailesh.kwebmaker

Stainless Steel vis-à-vis Rate of Tax Under MVAT Act, 2002

Introduction

The Commissions of Sales Tax, Maharashtra, has recently issued a Circular bearing No. 11T of 2014 dated 04-04-2014, by which it is informed that the sale of stainless steel wires will be liable to tax as non-declared goods i.e., at 12.5% in residual category, due to the judgment of the Supreme Court in the case of M/s. Bansal Wire Industries Ltd. (42 VST 372). The declared goods are covered by entry C-55 of the MVAT Act, 2002. If the goods are so covered, the tax is 5%. However, if they get excluded from above entry, the rate becomes 12.5%. Therefore, it is necessary to see the implication of above judgment and circular.

Background
The facts in this case are that the issue arose under the UP Trade Tax Act, 1948. Originally, the dealer was assessed to tax at 4% on the sale of stainless steel wires on the grounds that it is declared goods. However, the said assessment was revised, so as to levy tax on the sale of stainless steel wires at a higher rate, considering that it is not sale of declared goods.

The Hon’ble Allahabad High Court confirmed the view of the department. Therefore, the issue was raised before the Hon’ble Supreme Court.

The question which was referred to the Hon’ble Supreme Court is reproduced in the judgment as under:

“Whether stainless steel wire, a product of the appellant, on a proper reading of section 14 of the Central Sales Tax Act along with the qualifying words ’that is to say’ would fall under the category ’tool, alloy and special steels of any of the above categories’ enumerated in entry (ix) of Clause (iv) or under entry (xv) of same Clause (iv)?”

Consideration by Supreme Court

Hon’ble Supreme Court has analysed the position about declared goods. The Hon’ble Supreme Court has reproduced section 14(iv) of the CST Act, 1956 which enumerates declared goods. The said section is reproduced below for ready reference.

“14. Certain goods to be of special importance in inter-State trade or commerce.—It is hereby declared that the following goods are of special importance in inter-State trade or commerce,—

. . .

(iv) iron and steel, that is to say,—

(i) pig iron and cast iron including ingot moulds, bottom, plates, iron scrap, cast iron scrap, runner scrap and iron skull scrap;

(ii) steel semis (ingots, slabs, blooms and billets of all qualities, shapes and sizes);

(iii) skull bars, tin bars, sheet bars, hoe-bars and sleeper bars;

(iv) steel bars (rounds, rods, squares, flats, octagons and hexagons, plain and ribbed or twisted, in coil form as well as straight lengths);

(v) Steel structurals (angels, joists, channels, tees, sheet piling sections, Z sections or any other rolled sections);

(vi) sheets, hoops, stripe and skelp, both black and galvanised, hot and cold rolled, plain and corrugated, in all qualities, in straight lengths and in coil form, as rolled and in riveted condition;

(vii) plates both plain and chequered in all qualities; (viii) discs, rings, forgings, and steel castings;

(ix) tool, alloy and special steels of any of the above categories;

(x) steel melting scrap in all forms including steel skull, turnings and borings;

(xi) steel tubes, both welded and seamless, of all diameters and lengths, including tube fittings;

(xii) tin-plates, both hot dipped and electrolytic and tin-free plates;

(xiii) fish plates bars, bearing plate bars, crossing sleeper bars, fish plates, bearing plates, crossing sleepers and pressed steel sleepers, rails-heavy and light crane rails;

(xiv) wheels, tyres, axles and wheel sets;

(xv) wire rods and wires-rolled, drawn, galvanised, aluminised, tinned or coated such as by copper;

(xvi) defectives, rejects, cuttings or end pieces of any of the above categories.”

The Hon’ble Supreme Court has discussed the back ground of the above entry. The Supreme Court held that each sub-group in above section 14(iv) exhaustively enumerates the kinds of goods covered by each sub-group. In this respect, the Hon’ble Supreme Court referred to its earlier judgment viz; State of Tamil Nadu vs. M/s. Pyare Lal Mehrotra (1976)(1 SCC 834).

The Hon’ble Supreme Court observed that the stainless steel can be covered by sub-entry (ix) and therefore the items covered by (i) to (viii), if of stainless steel, they can be covered. However, the wires are mentioned in sub-entry (xv) and said entry is separate. The sub-entry (ix) being not applicable to entry (xv), the stainless steel wires cannot be covered by any of the entries in section 14(iv). The reasoning of the the Hon’ble Supreme Court is contained in para-28 of the judgment and further elaborated in para-33. Both paras are reproduced below for ready reference.

“28. The expression “of any of the above categories” appearing in entry Nos.

(ix) and (xvi) of Clause (iv) of section 14 of the Central Act would indicate that they would each be items referred in the preceding items. Therefore, even the expression “of any of the above categories” in entry No. (ix) of Clause (iv) would only relate to steel and alloy produced for any of the materials mentioned in item Nos. (i) to (viii). Thus, “stainless steel wire” produced by the appellant cannot be read into item No. (xv) which reads as “wire rods and wires-rolled, drawn, galvanised, aluminised, tinned or coated such as by copper”.

33. It is thus clear, that the language used in entry No. (ix) is plain and unambiguous and that the items which are mentioned there are “tool, alloy and special steels”. By using the words “of any of the above categories” in entry No. (ix) would refer to entries (i) to (viii) and it cannot and does not refer to entry No. (xv). However, entry (xvi) of Clause (iv) would be included in entry (xvi) particularly within the expression now therein any of the aforesaid categories. Therefore, the specific entry “tool, alloy and special steels” being not applicable to entry (xv), the contention of the counsel for the appellant has to be rejected. It is, therefore, held that the stainless steel wire is not covered within entry (ix) of Clause (iv) of section 14 of the Central Sales Tax Act.”

Conclusion
The above referred circular has taken into account above mentioned observations of the Hon’ble Supreme Court. Accordingly, it is clarified that the items made from stainless steel mentioned in subentries (x) to (xv) will not be covered u/s. 14(iv) of CST Act, 1956 i.e., they will not be considered as ‘declared goods’ and will also not be covered by entry-C-55 of the MVAT Act, 2002.Thus, the same are liable to tax at 12.5%. Some of the items affected by the above interpretation are melting scrap, skull, turnings, borings, specified tubes and tube fittings etc., if they are of the stainless steel. The stainless steel pipes will also get excluded from entry C-55 but they will be eligible to be covered by entry C-72 which is regarding pipes of all varieties. Therefore, for stainless steel pipes, the rate will still remain 5%. However, for stainless steel tubes, the rate will be 12.5%.

The judgment of the Hon’ble Supreme Court is binding. However, an issue still remains about interpretation of the scope of the main heading of section 14(iv) i.e., ‘iron & steel’, whether it covers stainless steel itself? Steel is not qualified by any particular quality. Therefore, it can be argued that the above heading itself covers stainless steel also. This issue is not considered in the above judgment. Therefore, the dealer community will be required to wait till some more light is thrown on the above aspect from none other than the Supreme Court itself in some future judgment. Till then, the law will be guided by the above judgment of the Supreme Court and the circular issued by the Commissioner of Sales Tax of Maharashtra State.

In the circular the position as per the above judg- ment in the case of M/s. Bansal Wire Industries Ltd. (42 VST 372) is sought to be applied from the date of judgment i.e., 26-04-2011. Therefore, dealers will be liable to pay a higher rate from the said date, which may attract an unforeseen liability for the past period from 26-04-2011. In fact, the impact of the above judgment may be from the inception of the section 14(iv) and hence revised rate can apply even prior to 26-04- 2011. However, it is stated in the circular that the matter is referred to government for period prior to 26-04-2011. It is common experience that the dealers have collected tax at 4% and 5% in respective periods, considering the impugned goods as ‘declared goods’. They are also assessed accordingly. Therefore, it is genuinely felt that in spite of the above judgment, the government should give necessary relief by administrative measures or by introducing changes in the entries and should apply the law prospectively i.e., from the current date after giving sufficient time to the dealer com- munity to adjust to new tax rate. In fact, by looking at the importance of goods, the rate should be continued at 5% by introducing new entries as they are getting out of the entry C-55 only because of technical interpretation of the entry. We expect that the government will consider the above situation and grant necessary relief.

shailesh.kwebmaker

Sale to and from SEZ — Whether in Course of Export/Import

Introduction

An interesting issue lingers on — Whether sale to a unit in Special Economic Zone (SEZ) by a Domestic Tariff Area (DTA) unit or by SEZ unit to DTA unit amounts to sale/purchase in the course of export/ import? The issue arises because SEZs have been given special status by Special Economic Zones Act, 2005 (SEZ Act, 2005).

Sale in course of Export/Import under Sales Tax Laws

As per Article 286 of Constitution of India, no tax can be levied on sale/purchase taking place in the course of export and import. Section 5(1) and 5(2) of CST Act, 1956 defines when a sale/purchase is said to take place in the course of export/import. The said definitions are reproduced below for ready reference:

“5. When is a sale or purchase of goods said to take place in the course of import or export

(1) A sale or purchase of goods shall be deemed to take place in the course of export of the goods out of the territory of India only if the sale or purchase either occasions such export or is affected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.

(2) A sale or purchase of goods shall be deemed to take place in the course of import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.”

The accepted meaning of the above section is that the goods should be going out of Indian territory or should be coming from outside Indian territory. Unless this fact is present, the argument of sale in the course of export/import is almost not tenable. In relation to SEZ, there is special enactment i.e., SEZ Act, 2005. In the said Act, SEZ is given a special status as foreign territory for various purposes. The transactions with SEZ unit by a DTA unit (either sale or purchase) are to be routed through import/ export formalities like, filing of bill of entry, etc. Therefore, a debate arises as to whether it can be said to be sale in the course of export/import for the purposes of the Sales Tax Acts.

Analysis of legal position
In light of the above definition of sale in course of export/import in section 5(1) and 5(2), reproduced above, it can very well be stated that there is no possibility to consider sale/purchase transactions with SEZ as in course of export/import. This view has now been approved by the Allahabad High Court. Reference can be made to judgment in the case of M/s. India Exports v. State of U.P. & Others, (Civil Misc. W.P. No. 1488 of 2009, decided on 11- 2-2011 (All.).

In this case the facts were that the petitioner was a unit in SEZ. It cleared its manufactured goods i.e., furniture for sale to a DTA unit. The petitioner claimed this sale to the DTA unit as its export or in other words sale in the course of import and not liable to sales tax. The Sales Tax authorities levied CST as applicable to normal sale and hence this writ petition before the High Court. Before the High Court section 53(1) of the SEZ Act was relied upon. The said section is reproduced below for ready reference:

“The Special Economic Zones Act, 2005

“53. Special Economic Zones to be ports, airports, inland container depots, land stations, etc., in certain cases. A Special Economic Zone shall, on and from the appointed day, be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorised operations.

(2) A Special Economic Zone shall, with effect from such date as the Central Government may notify, be deemed to be a port, airport, inland container depot, land station and land customs stations, as the case may be, u/s.7 of the Customs Act, 1962 (52 of 1962): Provided that for the purposes of this section, the Central Government may notify different dates for different Special Economic Zones.”

Important arguments
Some of the important arguments of the petitioner were as under:

(i) Sale from SEZ to DTA are sales in the course of import on which Central Sales Tax is not leviable under Article 286 and section 5(2) of the Central Sales Tax Act and for which no exemption notification is required.

(ii) Rule 47(1) of the SEZ Rules requires the buyer of DTA to submit import licence and Rule 47(4) provides for valuation and assessment of goods cleared for DTA to be made in accordance with the Customs Act and Rules; Rule 48 (1) requires the buyer of DTA to file a bill of entry for home consumption applicable to goods imported into India and Rule 48(2) provides for valuation of goods for customs duty in accordance with the provisions of the Customs Act. The territory of SEZ under these Rules shall be deemed to be territory outside the territory of India and thus any goods removed from SEZ to DTA are deemed to be goods imported from outside the territory of India. Section 5(2) of the Central Sales Tax Act deems sale and purchase of goods in the course of import only if the sale and purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India. The customs frontiers of India u/s.2(ab) of the Central Sales Tax Act means crossing the limits of the area of a customs station in which imported goods or export goods are ordinarily kept before clearance. There is no liability for payment of Central Sales Tax in respect of the sale and purchase of the goods in the course of import into the territory of India.

(iii) The customs duty is levied only on the goods imported into India, from territory outside India. Section 12 of the Customs Act, 1962 read vide Entry 83 of List-1 of 7th Schedule of the Constitution of India, and, section 53(1) and section 53(2) of the SEZ Act, the authorised operations in SEZ are deemed to be imports to SEZ as custom station, which covers port, air port, etc. The importer from SEZ to DTA is required to have import licence and to file a bill of entry. The deeming fiction in SEZ Act and Rules read with the Customs Act and Central Sales Tax Act makes the special transaction as import, exempt from Central Sales Tax.

(iv) The SEZ are deemed to be territory outside customs territory of India and thus they cannot be treated as part and parcel of any particular State in India. In the transaction of sale from SEZ to DTA there is no movement of goods from one State to another, calling for imposition of Central Sales Tax.

(v) The deeming fiction has to be given full play and affect and regulations assuming all facts on which fiction can operate.

Observations of High Court

The Allahabad High Court has held that the sale is taxable as any other sale within India. After referring to statement of objects and reasons for SEZ Act, 2005, the High Court observed as under:

20. We do not find any substance in the argument of Shri Bharatji Agrawal that the Central Sales Tax cannot be levied on the sales made by the petitioner from SEZ unit to a unit in DTA. The SEZ Unit under the SEZ Act, 2005 is deemed to be territory outside the territory of India u/s.51, 53(1) for a limited purpose; Ss.(2) provides that SEZ shall with effect from the date of Notification by the Central Government be deemed to be a port, airport, inland container port, land station and land customs station u/s.7 of the Customs Act.

21. The SEZ Act, 2005 has taken into consideration and has provided for amendment of the various taxing statutes, or modified them, for fulfilling the object and purpose of the Act. Section 7 provides for exemption from tax, duties or cess on any goods or services exported out of or imported into or produce from DTA by unit in SEZ or a developer subject to terms and conditions as may be prescribed and be exempt from the payment of tax, duties or cess under all enactment specified in the First Schedule. Section 27 of the SEZ Act, 2005 applies to the Income-tax Act with certain modifications in relation to developers and entrepreneurs who carry out authorised operations in SEZ and modifications are specified in Second Schedule. Section 57 amends the enactment specified in the Third Schedule, which are amended by SEZ Act, 2005. The Central Sales Tax is not included in any of these Schedules.

The High Court also observed that a deeming clause in one statute cannot apply to other unless so specified in the said statute or can be inferred. That being not the position in the above facts and circumstances of the case, the High Court held that the claim of sale in course of export/import is not tenable and confirmed levy of tax.

Conclusion:

This clarifies the position that unless there is specific scheme under the relevant sales tax laws, for sales tax purposes, the trade with or trade by SEZ will remain at par with DTA units.

shailesh.kwebmaker

Right of Cross Examination – A Crystallised Right

Synopsis
A question on sellers’ genuineness, leading to nonallowance of Input Tax Credit (ITC) to the buyers, has been frequently faced by sales tax payers. No opportunity for cross examination is afforded to the buyer to test or rebut the evidences used against him for such disallowance. Author throws light on the recent decision of Madras High court on this issue wherein it has been held that right of cross examination is the most essential right and the same cannot be denied to the buyer.

Introduction

There are a number of situations where the Revenue Departments rely upon material collected from opposite/third parties. For example, at present under Maharashtra Value Added Tax Act, 2002, the sales tax department is disallowing Input Tax Credit (ITC) to the buyers on the ground that the seller is non genuine dealer. The department for this purpose relies upon statement of the vendor, as well as his affidavit etc.

It is a common experience that no opportunity for cross examination of the adverse material used, is given to the concerned buying dealer. Further, no opportunity for personal cross examination of the vendor is given.

The issue which arises is whether such procedure is acceptable in the eyes of law?

Recent Madras High Court judgment in case of Thilagarathinam Match Works vs. Commissioner of Central Excise, Tirunelveli (295) E.L.T. 195 (Mad.)

The issue as to whether granting of opportunity for cross examination is necessary or not had arisen in above case.

The facts were that the petitioners in writ petitions challenged orders passed by the Enquiry Officer, rejecting their request for cross-examination of certain officers and persons in an enquiry, in pursuance of the show cause notices, issued u/s. 11A of the Central Excise Act, 1944. In the annexure to the show cause notices, the authorities relied upon the reports of the Energy Auditor as well as the statements of some officers and witnesses. The petitioner made a request for the cross-examination of those officers and witnesses.

Before the High Court, the Excise Authority took objection to the request of the petitioners for cross-examination on following grounds:

(i) that the petitioners prolonged the issue even without submitting an explanation to the show cause notices for more than one and half years;
(ii) that the petitioners have not adduced any reasons for cross-examination of those persons; and
(iii) that none of the witnesses have retracted from their original statements.

Based on above facts, the Hon. High Court held that even if the petitioners had never submitted any explanation to the show cause notices, the conduct of an enquiry becomes necessary and the cross-examination of the officers, who are authors of the statements, crystallises into a right for the petitioners. Thus, the first objection to the request for cross-examination was rejected.

About second objection to the request for crossexamination that the petitioners had not stated any reason for cross-examination of those persons, the Hon. High Court held that no reason need be stated by any person for requiring crossexamination. In an enquiry, a person gets two kinds of rights. The first set of right revolves around the right to peruse the documents relied upon by the department and the right to crossexamine the witnesses on whose statements the enquiry or prosecution is based. The second set of right revolves around the right to produce the witnesses and documents in defence. If a person facing an enquiry seeks to summon some persons to be examined in his defence or seeks to summon some documents to be produced in support of his defence, it is open to the enquiry officer to ask the delinquent to justify such a request by adducing reason. But, insofar as cross-examination is concerned, no justification need be provided in the form of reasons by a delinquent. The very fact that some statements of some officers are relied upon is good enough reason for permitting cross-examination. The very fact that the right of cross-examination is part of the most essential rights is sufficient to grant the request. But, the enquiry officer cannot test the request for cross-examination on the strength of the reasons. Therefore, the second ground on which the request of the petitioners is rejected, also cannot be sustained, held the Hon. High Court.

In respect of the third ground on which the request of the petitioners was rejected was that none of the witnesses had retracted from their original statements. Retraction from an early statement would normally occur only during the course of the enquiry. In the course of the enquiry, witnesses had not been examined. In other words, the respondents have presumed that the right to cross-examine would arise only in cases, where witnesses retract from their early statements. That is a wrong presumption or understanding of the law. The purpose of cross-examination is only to disprove the statements given by the witnesses. If the witnesses had already retracted from their original statements, the petitioners would have been well advised not to ask for cross-examination at all. This aspect has not been appreciated by the respondents, held the Hon. High Court. Therefore, it was held that the third objection also was not sustainable.

Conclusion
The law on the issue of right of cross examination is thus clear. The above principle duly applies to sales tax department. Assuming that the sales tax department may be correct in its investigation, still the department is under obligation to grant opportunity of cross examination as per the law laid down above, as well as to comply with the principles of natural justice. It thus transpires that disallowing ITC without above opportunity is bad in law.

There are two aspects about ITC. If transaction is non-genuine, ITC cannot be allowed even though seller might have paid tax. However, this fact requires to be established by following the above principle of law.

The truth whether transaction was genuine or not, can get established only upon providing an opportunity of cross examination.

The other aspect is that the transaction is genuine but tax is not paid by concerned vendor. In such case disallowing ITC to buyer will be incorrect. The concerned vendor should be first assessed as he is first in sequence. The recovery should be made from him. Without assessing him, jumping upon next buyer will be inappropriate and cannot withstand the legal position.

Hence ascertainment of correct position of transaction is very much necessary and for that purpose cross examination opportunity is mandatory.

Therefore, the one way process adopted today by the sales tax authorities can not be said to be correct as per law. The buyers can expect justice in due course of appeal at higher forum.

levitra

shailesh.kwebmaker

Registration charges and handling charges vis-à-vis ‘sale price’

Under any Sales Tax Law the tax is leviable on the valuable consideration received from buyer for sale of goods. This is referred to as ‘sale price’. This term is normally defined in the Sales Tax Laws. Under the Maharashtra Value Added Tax Act, 2002, the said term is defined in section 2(25) as under:

“(25) ‘sale price’ means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged . . . .”

Thus the definition speaks about consideration received till the delivery given as ‘sale price’. Sometime the contentious issue arises while interpreting the above definition. Particularly when selling dealer collects certain amounts separately on ground of separate subject-matter, the issue arises whether such charges are part of sale price or not.

Similar issue arose in relation to registration charges and handling charges recovered separately by the motor vehicle dealer from its customers. The dealer issues sale invoice for price of the motor vehicle. He also prepares separate debit note for recovering insurance charges, road tax, incidental and handling charges, registration fees etc. The charges recovered towards specific taxes etc. are paid to respective authorities. The handling charges are retained by the motor vehicle dealer for himself as his service charges. The Sales Tax Department sought to consider the above charges as part of sale price and levied tax on the same. The periods involved were 2005-2006 to 2007-08 under the MVAT Act, 2002.

Tribunal judgment

When the issue came before the Tribunal, the position was scrutinised as to when the sale is complete, when the delivery is given and the nature of separate charges collected through debit notes, i.e., whether post delivery or prior to delivery, etc. The Tribunal came to the conclusion that the separate charges are post-delivery charges and cannot be included in ‘sale price’.

Bombay High Court judgment

Additional Commissioner of Sales Tax v. Sehgal Autoriders Pvt. Ltd., (Sales Tax App. No. 5 of 2011 dated 11-7-2011)

The issue was taken by the Department to the Bombay High Court by way of appeal under the MVAT Act, 2002. The High Court has now decided the issue.

Before the High Court the main argument of the Department was that the delivery is to be seen in light of effective delivery. It was contended that as per Motor Vehicle Act/Rules the motor vehicle cannot be plied on road unless registered. It was argued that the customer can drive away the vehicle from the dealer’s place when it is registered in his name and since the charges mentioned above are prior to the above event they are taxable.

On behalf of the dealer it was contended that the registration is the responsibility of the buyer who becomes owner of the vehicle. It is only the owner who gets it registered. The sale note is issued for the said purpose which completes sale and delivery. The further activities of registration, etc. are on behalf of the buyer as agent and the handling charges are towards such services, a separate transaction and it is a post-sale transaction. It was also contended that the provisions of the Motor Vehicles Act are for separate purpose and cannot be brought in for interpretation of the MVAT Act. The provisions of sale of the Goods Act, 1930 were also relied upon.

The High Court referred to Rule 47 of the Mo-tor Vehicle Rules and observed that as per the said rule the dealer has to issue a certificate of giving delivery to the buyer, so as to enable the registration of the vehicle under the Motor Vehicle Act. The High Court on the above facts observed as under:

“15 The contention of the Revenue, however, is that delivery cannot be granted to the owner by the holder of a trade certificate under Rule 42 unless the motor vehicle has been registered. Rule 42 however does not as it cannot override the obligation which section 39 imposes on the owner of obtaining registration. Moreover, Rule 42 cannot be construed in isolation from the other provisions which have been made in Chapter III of the Central Motor Vehicles Rules, 1989.

Rule 41, for instance, specifies the purposes for which the holder of a trade certificate may use a vehicle in a public place. Among the purposes is for proceeding to and from any place for the registration of the vehicle. Similarly, under clause (d) of Rule 41, the holder of a trade certificate may use a vehicle in a public place for proceeding to or returning from the premises of the dealer or of the purchaser for the purpose of delivery. Rule 42 provides that no holder of a trade certificate shall deliver a motor vehicle to a purchaser without regis-tration, whether temporary or permanent. It is evident that an application for registration is required to be made in accordance with Rule 47. Rule 47, as a matter of fact, stipulates that an application for registration has to be made within a period of seven days from the date of taking delivery of the vehicle. The application has to be accompanied by a sale certificate. The statutory form for the sale certificate stipulates that delivery has been handed over to the purchaser. The Tribunal, in the present case, has found, as a matter of fact, that upon receipt of the price of the goods, the respondent issues a gate pass in the name of the purchaser and issues a sale certificate in the prescribed form showing delivery of the motor cycle. The sale is complete and transfer of property in the motor cycle takes place to the purchaser coupled with the delivery thereof. The obligation to obtain registration is that of the purchaser. When a dealer facilitates the obtaining of a registration certificate, he acts for and on behalf of the purchaser, because the obligation under the law to obtain a registration certificate is cast upon the owner of the vehicle. The application for the issuance of a registration certificate and the grant of a registration certificate are both post-sale events. The charges that are levied by the appellant and recovered as handling charges are in respect of a service rendered to the purchaser upon the completion of the sale of the motor cycle. Handling charges cannot be regarded as forming part of ‘the valuable consideration paid or payable to a dealer for any sale made.’ The handling charges cannot be regarded as ‘any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof.’

Observing as above the High Court held that the holding of the Tribunal that registration/handling charges is not part of sale price was correct and did not not require any interference.

Conclusion

The judgment, amongst others, will be a guiding judgment in understanding the nature of charges before delivery, which can be part of sale price and also nature of charges post delivery, which cannot be part of sale price.

shailesh.kwebmaker

‘Consumables’ vis-à-vis taxable Works Contracts

Introduction After works contract transactions were brought under sales tax laws by deeming fiction inserted by clause (29A) in Article 366 of the Constitution of India, the controversy has still continued about the nature of taxable works contract. The transaction becomes taxable works contract transaction, if there is transfer of property in goods, in the execution of works contract, from the contractor to the contractee. The issues are not very much debatable if the transfer of property in goods is apparent. Like, a building contractor may use cement and other building material for construction of a building for which a contract is awarded to him by the contractee. In this case, there is no debate as there is transfer of property in cement and other building material from the contractor to the contractee. It is very apparent and hence it becomes a taxable works contract. The issue arises when the fact towards transfer of property is not apparent and it has to be ascertained on peculiar facts of the case.

Nature of charges allowable as deduction for deciding taxable value of the contract The works contract, being a composite contract, the labour portion also referred to as ‘Service Component’, is required to be deducted from the total value of the contract to arrive at value of the goods transferred. The tax is leviable on such reduced portion. In Gannon Dunkerley & Co. v. State of Rajasthan, (88 STC 204), the Supreme Court, for deciding the value of goods involved in the execution of works contract on which sales tax can be levied, laid down as under:

“The value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover:

(a) labour charges for execution of the works;
(b) amount paid to a sub-contractor for labour and services;
(c) charges for planning, designing and architect’s fees;
(d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;
(e) cost of consumables such as water, electricity, fuel, etc., used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract;
(f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;
(g) other similar expenses relatable to supply of labour and services; and
(h) profit earned by the contractor to the extent it is relatable to supply of labour and services.

The amounts deductible under these heads will have to be determined in the light of the facts of a particular case, on the basis of the material produced by the contractor.”

One of the items deductible from the contract value is value of consumables. Therefore, if the goods used are proved to be consumable items, then it will be allowed as deduction and if that is the only material used (which is allowed as consumables), then there will not be any transfer of property from contractor to contractee and the whole transaction will be out of scope of taxable works contract under sales tax laws. The issue is about meaning to be assigned to ‘consumables’.

Meaning of consumables Recently, the Full Bench of the Kerala High Court had an occasion to decide the above issue. The reference is to the judgment in case of M/s. Enviro Chemicals v. State of Kerala, (39 VST 434).

In this case, the dealer had used his chemicals for treatment of effluent water coming out of the factory of the contractee, who had awarded this contract to him. The process of treatment is narrated in the judgment as under:

“From the collection tank, the wastewater is pumped at a uniform rate to the flash mixer and subjected to chemical treatment. The chemical is a combination of ferrous sulphate, ferrous chloride and sulphuric acid. These chemicals are obtained by the petitioner from effluents discharge from Travancore Titanium Products. An addition of required dosage of lime is also added. The chemical mixture is named by the assessee as Envirofloc. Due to this, coagulation of the suspended particles and precipitation of dissolved organics take place. The solid particles settle at the bottom and the clear liquid overflows. The overflow from the Clariflocculator is taken to the aeration tank and subjected to activated sludge process. Oxygen is supplied by means of surface aerators.

The overflow from the aeration tank is sent to the hopper bottom settling tank. The outlet of the secondary settling tank is the treated effluent which is discharged to the river and it will be odourless. It will not contain chemicals or any pollutant.”

Considering that no property in the chemicals used is passed to the contractee, the plea of the appellant dealer was that there is no taxable works contract. It was argued that the chemicals used get consumed in the process and hence there is no transfer of property to the contractee so as to constitute taxable works contract under sales tax laws. As there were differing judgments, the issue was referred to the Larger Bench. The Larger Bench has decided the issue by majority.

The Larger Bench has relied upon the judgment of the Supreme Court in the case of Xerox Modicorp Ltd. v. State of Karnataka, (142 STC 209). In relation to ratio laid down by the Supreme Court in the above judgment, the High Court has observed as under:

“13. After having considered the entire case law cited before us and on a conspectus of the provisions, we would think that the learned Special Government Pleader is right in his contention based on the decision of the Apex Court in Xerox Modicorp Ltd.’s case 142 STC 209. It is no doubt true that the contract as such is not placed before us, if it is one which is reduced to writing. But we will proceed on the basis that the process involved is substantially the same as has been indicated by the assessee and which we have extracted. It is undoubtedly true that even after the 46th amendment, sales tax cannot be levied merely because there is a works contract. There must be transfer of property in the form of goods or otherwise than in the form of goods. What is taxable is the transfer of property in goods (See the definition of sale in the Act in this regard). It does not matter whether the transfer of property takes place in the form of goods or in any other form. It is undoubtedly also true that in view of the decision of the Apex Court in M/s. Gannon Dunkerley & Co. and Others v. State of Rajasthan and Others, [1993 (1) SCC 364] that the cost of consumables involved in works contract cannot be taxed.

14. That the chemical in question is goods, is beyond doubt. It cannot be disputed that the assessee was the owner of the goods in question, namely, the chemical. It is obviously the intention of the parties that the assessee must use the chemical in the effluent treatment process. It is equally indisputable that the assessee has actually used it. No doubt, in the judgment of the Apex Court in Xerox Modicorp Ltd. v. State of Karnataka, [(2005) 142 STC 209], the Apex Court found that the toners and developers are liquids put into the xerox machine and they perform essentially the same function as ink in the printers and the Court also relied on the provision in the contract that the assessees in the said case would charge for the unaccounted stock at prevailing prices. By using the chemical, the petitioner/assessee rendered the effluent compliant with the standards. It could probably be said that in the case of the toner and developers as the function is that of ink in printers, it shows up in the final product of the xerox machines. But, the decision of the Apex Court is not based on there being any requirement that the items which are used should exist in any form in the resultant product, which is the principle laid down by this Court in Teaktex Processing Complex Limited v. State of Kerala, [(2004) 136 STC 435] and also in Microtrol Sterilisation Services Pvt. Ltd. v. State of Kerala, [(2009) 26 VST 213 (Ker.)].”

After referring to the above ratio, in relation to the facts of the dealer in this case, the High Court has observed as under:

“16. When the assessee has used it, will it remain the owner of the chemical any longer? Will not the property in the goods pass to the awarder? We would think that the moment the assessee pours the chemicals into the effluent, he will cease to be the owner and at that point of time the awarder must be deemed to have taken delivery of the same. In our view the fact that upon it being poured into the effluent, it loses its identity and that it is consumed will not detract from the fact that there is delivery of the same to the awarder. The assessee does not have a case that the effluent belongs to the assessee. We do not think that it can be their case that the effluent does not belong to the awarder. Let us pose a question, if a complaint by a third party is raised about the treated effluent, can the awarder absolve itself of the ownership of the same? We would think, it may not be possible. Therefore we would be justified in holding that the effluent and the treated effluent both belonged to the awarder. It is, therefore, into the property of the awarder, namely, the effluent that the assessee supplies the chemical. The Apex Court in its decision in Gannon Dunkerley & Co. v. State of Rajasthan & Others, [(1993) 1 SCC 364] had, inter alia, held that cost of consumables, such as water, electricity, fuel, etc. used in the execution of the works contract, the property in which is not transferred in the course of execution of a works contract, is to be deducted. In section 5C also, the words “not involving any transfer of property in goods” have been incorporated. Just like the toner and developer having been put into xerox machine becoming the property of the customer in the case before the Apex Court in Xerox Modicorp Ltd. case and the sale taking place before the goods are consumed, in the same way, the property in the chemical passed to the awarder the moment they are put into the effluent by the assessee and its subsequent consumption is the consumption after sale and it does not detract from the factum of sale and consequently the exigibility to tax becomes unquestionable.”

Conclusion
The above judgment throws new dimension to the concept of consumables. It appears that if the goods used are consumed without involving into the actual execution, then it will be deductible as consumable. Like, fuel, which is used for running the machinery with which contract may be executed. The fuel is not getting directly involved in the works contract. However, if the goods used directly take part in the contract and which directly or indirectly interact with the materials of the party, then even if they ultimately get consumed, it will be consumable for the contractee, but for the contractor it may amount to transfer of property to the contractee, whereby he will be considered as liable to works contract. It may however be noted that the dissenting Judge has accepted the argument of the dealer that since there is no transfer of property to contractee, there is no taxable works contract. However by majority the transaction is held as taxable. The judgment will have a very substantial impact in the matter of interpretation of nature of taxable works contract.

shailesh.kwebmaker

Sale to Bombay High Area, Whether Inter-state sale?

Introduction

Under Sales Tax Laws, transactions of sale are liable to tax. The Constitution of India has provided adequate safeguards against unauthorised taxation of any transaction. Section 4 of the Central Sales Tax Act, 1956, provides for situs of sale. In other words, the State in which sale is taking place is to be determined by way of section 4 of the CST Act, 1956, which reads as under: “4. When is a sale or purchase of goods said to take place outside a State

(1) Subject to the provisions contained in section 3, when a sale or purchase of goods is determined in accordance with sub-section (2) to take place inside a State, such sale or purchase shall be deemed to have taken place outside all other States.

(2) A sale or purchase of goods shall be deemed to take place inside a State, if the goods are within the State —

(a) in the case of specific or ascertained goods, at the time of the contract of sale is made; and

(b) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer, whether assent of the other party is prior or subsequent to such appropriation.

Explanation :

Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of this sub-section shall apply as if there were separate contracts in respect of the goods at each of such places.”

Therefore, a sale takes place in the State where the goods are ascertained to the contract of sale.

Normally there are three kinds of sale: One, local sale i.e., within the same State, second, inter-State sale i.e., when the sale occasions movement of goods from one State to another State and the third type of sale is export sale where the goods moves to a destination out of India.

Sale to Bombay High — a fourth kind of sale

An interesting issue that is being debated is whether sale made to ONGC for its oil platforms (known as Bombay High region) are liable to tax as inter-State sale? The judicial history of above issue can be briefly tracked as under:

In case of Pure Helium (India) P. Ltd. (A. No. 48 of 90, dated 30-4-1994), M.S.T. Tribunal held that sale to ONGC for Bombay High region is inter-State sale.

In Pure Helium India P. Ltd. S.A. Nos. 1472 to 1477 of 1994, dated 7-12-1996. M.S.T. Tribunal held that sale to ONGC for Bombay High Region is export sale.

Looking to the conflicting judgments referred above, the Division Bench referred the matter in case of Industrial Oxygen Company Ltd (S.A.No. 45 of 1990) and Pure Helium Ltd (S.A. No. 592 of 2007) to the Larger Bench of the M.S.T. Tribunal. The Larger Bench by its judgment dated 9-7-2010 held that the sale to ONGC for Bombay High is inter-State sale and not export.

Recent judgment of the Gujarat High Court in the case of Larsen and Toubro Ltd. v. Union of India, (2011 VIL 46 Guj. dated 2-9-2011). This is the latest judgment on the issue from a High Court.

The transactions effected by Larsen & Toubro Ltd. to ONGC for the above Bombay High Region were held as inter-State sale and taxed accordingly under the CST Act. Hence writ petition was filed before the Gujarat High Court.

The facts in this case are noted in para 6 of the judgment as under:

“6. It is the case of the petitioners and with respect to which no dispute has been raised by the respondents that all the above four contracts were indivisible turnkey projects consisting both of supply of goods and rendition of service including labour. To execute such turnkey contracts, the petitioners had arranged for supply of certain parts, equipments and machineries from its Hazira plant at Surat to ONGC at Bombay High, which is situated around 180 kms off the baseline of coast of India and forms part of ‘Exclusive Economic Zone’. It is also an undisputed position that such goods were used in execution of turnkey project of erection, installation and commissioning of the platforms located in Exclusive Economic Zone and only on commissioning that the petitioners’ obligation under the contract would stand discharged. It is thus the case of the petitioners that the title of goods supplied by the petitioner to ONGC, during the course of and in furtherance of execution of the turnkey project, passed at Bombay High and not at Hazira. Even the respondents, in particular, the State authorities, under the CST Act, have accepted this factual stand of the petitioners and the entire order under challenge is founded on such admitted facts. We have, therefore, proceeded to examine the grievances of the petitioners on the basis of this conceded factual position, namely, that the title of the goods sold by the petitioners to ONGC passed at ONGC site at Bombay High and not at Hazira.”

The Gujarat High Court examined the issue in light of Articles 1 and 297 of the Constitution of India and the provisions of the Territorial Waters, Continental Shelf, Exclusive Zone and other Maritime Zones Act, 1976 (Maritime Zone Act).

After elaborately examining the issue the Gujarat High Court has held as under:

“34. From the above provisions it can clearly be seen that though the Union of India has certain rights over the Exclusive Economic Zone, the Indian Union does not have sovereignty over such a region. Clause (a) to s.s (7) of section 7, for example, provides that the Union has, over the Exclusive Economic Zone, sovereign rights for the purpose of exploration, exploitation, conservation and management of the natural resources. Sovereign rights are thus for the limited purposes provided therein.

S.s (4) of section 7 does not speak of unlimited sovereign rights, much less sovereignty of the Union of India over the exclusive economic zone. It is only by virtue of the Notification in Official Gazette that the Central Government may declare any area of exclusive economic zone to be a designated area and make such provision as it may deem necessary with respect to such area for different purposes including for the purpose of customs and other fiscal matters in relation to such designated area. Further s.s (7) of section 7 empowers the Central Government to issue Notification to extend certain laws to any part of the exclusive economic zone and to make such provisions as are necessary for enforcement of such enactments. It is further provided that thereupon the enactments so extended shall have effect as if the exclusive economic zone or the part thereof to which it has been extended is a part of the territory of India. The language used in clause (b) of s.s (7) of section 7 to the Maritime Zones Act is significant as it does not provide that the designated area upon Notification by the Union of India, shall be part of the territory of India. It provides that law so notified shall be extended as if the exclusive economic zone or the part thereof is a part of the territory of India. The language is clear and gives rise to a deeming fiction for the limited purpose of extension and application of laws notified and for that limited purpose the Exclusive Economic Zone shall be deemed to be a part of the territory of India. It is not the same thing as to suggest that the Exclusive Economic Zone becomes part of the territory of India. It is not even the case of the respondents that the Exclusive Economic Zone is part of the territory of India as provided in Article 1 of the Constitution of India. There is no claim of sovereignty over such an area, it is sovereign rights which are extended to such area by virtue of formation of the Exclusive Economic Zone for the limited purposes envisaged under the statute. By virtue of clause (b) of s.s (7) of section 7 of the Maritime Zones Act it becomes further clear that as and when the Union of India issues Notification extending any enactment over the Exclusive Economic Zone or part thereof such enactment extended is applicable as if the Exclusive Economic Zone or part thereof to which it has been extended is a part of the territory of India.

“35. In view of the above discussion, it clearly emerges that when the sale of goods took place at Bombay High, for which the goods moved from Hazira to Bombay High, such movement does not get covered within the expression ‘movement of goods from one State to another’ contained in clause (a) of section 3 of the CST Act. It is clear that the goods had not been moved from one State to another since, in our opinion, Bombay High does not form part of any State of the Union of India.”

Accordingly the Gujarat High Court held that the taxing of given transaction under the CST Act is unauthorised and set aside the assessment. The Gujarat High Court has made it clear that it is not examining the issue whether it is export sale or not and also there can be possibility of local sale, as those are not the issues involved here. However, the Court held that since it was not an inter-State sale, tax under the CST Act was not chargeable, held the Gujarat High Court. Thus now there is a possibility of one more kind of sale which is neither local, inter-State nor export, but at the same time not liable to Indian Sales Tax Laws.

The judgment will go a long way in solving the issues in various States, including Maharashtra.

shailesh.kwebmaker

Penalty u/s.61(2) for late filing of VAT Audit Report vis-à-vis discretion of the authorities

Introduction
Under the Maharashtra Value Added Tax Act, 2002, one of the distinguishing features is that the dealers, having turnover more than prescribed limit, are required to get VAT Audit report from a Chartered/ Cost Accountant. This report is in Form 704 and is required to be filed within the stipulated time. The normal time is 10 months from the end of the relevant financial year, though, in the past, extensions were given on administrative ground. In any case, if there is delay after the due date, penalty is provided u/s.61(2), for such delayed filing of report. The said section is reproduced below for ready reference.

“(2) If any dealer liable to get his accounts audited under subsection (1) fails to furnish a copy of such report within the time as aforesaid. The Commissioner may, after giving the dealer a reasonable opportunity of being heard, impose on him, in addition to any tax payable, a sum by way of penalty equal to one-tenth per cent, of the total sales.

Provided that, if the dealer fails to furnish a copy or such report within the period prescribed under sub-section (1), but files it within one month of the end of the said period, and the dealer proves to the satisfaction of the Commissioner that the delay was on account of factors beyond his control, then no penalty under this sub-section shall be imposed on him.”

Thus, the law provides for a steep penalty for delayed filing of VAT Audit Report. As per proviso delay up to one month, with reasonable cause, can be condoned.

Case of Nitco Paints Ltd. (42 VST 71) (Bom.)

One of the issues dealt with by the Bombay High Court in this case was that the authorities have discretion as to levy or not to levy penalty even if the delay is beyond one month, if there is reasonable cause. This gave relief to the dealer in-as-much as even a delay of more than one month can be condoned.

Tribunal judgment in case of Ankit International (VAT SA No. 161 of 2010)

In this case M.S.T. Tribunal was concerned with penalty u/s.61(2) for the year 2006-07. In the original order penalty was levied at Rs.83,013 calculated at 0.1% of the turnover as per limit given in section 61(2). In the first appeal the amount was confirmed. In second appeal Tribunal considered the facts of the case and reduced the penalty by 70% and confirmed the same at 30%.

The Sales Tax Department filed appeal before the Bombay High Court challenging the above order of the Tribunal on the ground that there is no authority with the Tribunal to reduce the amount. The argument of the Department was that there is discretion to levy or not to levy penalty depending upon the facts of the case, but if the authority decides to levy penalty, then there is no discretion about amount of the penalty. In other words, the argument was that once the authority decides to levy the penalty, then the amount is fixed, it should be calculated at 0.1% of the turnover of sales. The language used for determining the amount was relied upon along with judgment of the Supreme Court in case of Union of India v. Dharmendra Textile Processors, (18 VST 180) (SC).

Judgment of Bombay High Court in case of Ankit International (STA No. 9 of 2011, dated 15-9-2011)

The High Court has decided the issue about discretion of amount, vide judgment as above. The High Court considered the judgments cited by the Department. However, the High Court observed that there is difference in the language of the provision. In section 61(2), the words used are ‘may’. If the words used are ‘shall’ it will have different connotation. The High Court also considered the harsh effect of the above provision and further observed that two views are possible from the language of section 61(2). The High Court observed as under:

“13. Having therefore, considered the submission which has been urged on behalf of the appellant, we are of the view that there is no reason to accept the contention that the discretion which is conferred by section 61(2) does not extend also to the quantum of the penalty. Under the substantive part of s.s (2) of section 61 the State Legislature has conferred discretion on the Commissioner before he imposes a penalty on the dealer for failing to furnish a copy of the audited report within the prescribed period. The proviso to s.s (2) states that if the dealer fails to furnish a copy of the said report within the prescribed period, but files it within one month of the end of the period, and the dealer proves to the satisfaction of the Commissioner that the delay was on account of factors beyond his control, then no penalty under this sub-section shall be imposed upon him. Hence, in the circumstances set out that the proviso to s.s (2), no penalty can be imposed at all if the conditions therein are fulfilled. The proviso operates when (i) the dealer fails to furnish a copy of the report within the prescribed period, but files it within one month of the end of the period; (ii) the dealer proves to the satisfaction of the Commissioner that the delay was for reasons beyond his control. Where the proviso applies, no penalty can be imposed on the dealer at all. The proviso is an exception and does not control the substantive part of section 61(2). The substantive part of s.s (2) of section 61 also confers discretion upon the Commissioner which is not diluted by the proviso to s.s (2).

14. In any event, we are of the view that if two views in regard to the interpretation of section 61(2) are possible, the Court would be justified in adopting that construction which favours the assessee. (See decisions of the Supreme Court in The Commissioner of Income Tax v. Vegetable Product Ltd. 10 and Mauri Yeast India Pvt. Ltd. v. State of U.P.)”

Accordingly the High Court confirmed order of the Tribunal reducing penalty and held that the authorities have discretion regarding the amount penalty as were.

Conclusion

Any penal provision is for creating a deterrent effect. However, if the amounts determined are very high, it creates a difficult situation for the dealers. If in case of technical delays also the amount remains fixed and even when a dealer may not be liable to pay any tax amount, he will be lailable to pay such high amount of penalty for delay in submitting VAT Audit Report. This is not the expected result of section 61(2) of the MVAT Act. Therefore, the above judgment will give much desired relief to the dealer community and now quantum of penalty will depend upon the facts and gravity of the offence.

levitra

shailesh.kwebmaker

IMPORTANT RECENT AMENDMENTS UNDER MVAT ACT, 2002

While presenting the Budget for 2011-12 the Finance Minister of Maharashtra proposed certain amendments in the MVAT Act, 2002. Accordingly, L. A. Bill No. XVII of 2011, dated 8-4-2011 was introduced in the Assembly. The said Bill has become law namely, Maharashtra Tax Laws (Levy, Amendment and Validation) Act, 2011 (Mah. Act. No. XV of 2011) dated 21-4-2011. The amendments have come into operation from 1-5-2011 as Notification to that effect is issued bearing no. VAT.1511/CR-63/ Taxation 1 dated 28-4-2011. The important changes brought in by the above Amendment Act can be briefly noted as under:

1. Amendments in respect of Voluntary Registration:

As on today, the Registration under Voluntary Registration Scheme (VRS) is granted on the basis of advance payment of Rs.25,000. The said amount is adjustable against the liability which may be payable in the returns to be filed after registration.

However, now as per amendment in section 16(2) of the MVAT Act, 2002, the advance payment of Rs.25,000 will be treated as Security Deposit with the Government. It will not be allowed to be adjusted against liability. It will be refunded back after certain period, if there is no breach of any of the conditions which are laid down in this regard. As per newly inserted section 16(2A) of the MVAT Act, 2002, the Government can prescribe conditions for refund of deposit. The said conditions are prescribed by way of Rule 60A.

As per Rule 60A, it is the dealer who has to apply for refund of deposit. The application of refund can be made after 36 months from the end of month in which registration is granted but before 48 months from the said month. In case of cancellation of Registration Certificate (RC) before above period of 36 months, the application is to be made within six months from such date of cancellation. The application is to be made to registration authority and such authority should grant the refund within 90 days from receipt of application, subject to the dealer filing all returns as well as paying taxes as per the said returns.

2. Revised returns:

It is obligatory upon the dealers to file correct and complete returns by prescribed time. There are a number of events which may require correction in the original return or earlier revised returns. Therefore, the law permits dealers to file revised returns. This gives him opportunity of clearing himself of any charge of concealment or to prefer an additional claim, if any.

Up till now, there were no restrictions on the number of revised returns which can be filed by the dealers. In other words, a dealer could file more than one revised returns to correct the mistakes committed in the original returns or earlier revised returns.

However, now by the amendment a tab is put on the number of revised returns which can be filed by a dealer. As per section 20(4)(a), (b) and (c), there are three kinds of revised returns. A revised return can be filed suo motu or it can be to give the effect to VAT audit findings or it can be to give effect to findings of the business audit. The amendment seeks to allow only one revised return in each of the above categories. Though the amendment provides as above, a view can be taken that the dealer can file more than one revised returns to put up his position and in course of assessment such returns are also expected to be considered.

A dealer will now have to be very careful about filing revised return. He has to be certain that all the corrections are included in the particular one revised return. Allowing more than one revised return could not have caused any difficulty to the Department, but the curtailment will certainly cause great difficulty to the trading community.

It may be mentioned that in the category of suo motu revised return, the time limit was nine months from the end of concerned period/year. It is now enhanced to ten months.

This is an amendment about procedural law and the Department will take a view that the restriction operates from 1-5-2011. Therefore even for the returns for period prior to the above effective date, the restriction will be applied and accordingly after the above effective date the dealer may be permitted to file only one revised return relating to the said prior period.

3. No appeal against order levying interest:

The trend of amendments appears to be against the dealer community. The Government has debarred dealers from getting justice in case of levy of interest. The appeals against interest leviable u/s.30(2) and 30(4) are already prohibited by an amendment in 2010. However, appeals against interest u/s.30(1) (interest on URD) and 30(3) (differential dues) were allowed. Now section 26(5) is amended, whereby clause (c), which gave power to the Appellate Authority to deal with interest orders is deleted. Indirectly, the appeals will not be maintainable against the above interest u/s.30(1) and 30(3). Thus, one more beneficial provision is being done away with to the detriment of the dealer community. There will not be an opportunity to get justice in case of wrong levy.

It may be noted that appeals against orders levying interest u/s.30(1) and 30(3) themselves are not debarred. Therefore, it is possible to argue that the said appeals can be filed and the Appellate Authority can decide the matter under clause (d) of section 26(5) which covers appeal against any other order. Therefore, it appears that the dealers can still take an opportunity u/s.26(5)(d).

4. New taxation scheme for liquors:

Uptill now the liquors were taxed as per normal VAT chain. Every dealer was getting set-off and was liable to tax on sales.

Now from 1-5-2011 the system is changed. Wine is continued to be taxed as per the old system. Change is brought in taxation of IMFL, foreign liquors and country liquors by issue of Notification dated 30-4-2011 as per newly inserted section 41(5). The brief features of the new system can be noted as under:

(a) Manufacturer of liquors holding licence in PLL, BR-L and CL-I will be liable to tax @ 50% of sale price subject to limit of tax amount calculated as per Formula MRP x 25/125. They will be required to mention MRP on sale bills.

(b) Wholesalers holding licence in FL I, CL II will be exempt from tax if liquor is purchased from registered dealer in Maharashtra. No set-off is available to a wholesaler. If wholesaler has imported liquor from other State/country he will be required to discharge tax liability like a manufacture i.e., 50% of sale prices subject to limit of tax calculated as per formula MRP x 25/125.

(c) Retailer holding licence in FL IT, FL-BR-H, CL/ FL/TOD-III and CL-III will also be exempt from tax if liquor is purchased from registered dealers in Maharashtra. No set-off to them.

(d) Hotel, bars, restaurants and clubs (3-star and below):

Bars, restaurants and clubs holding licence in FL-III or FL-IV or E with grading of 3-star and below will be required to pay tax at 5% on the actual sale price of liquor which is purchased from registered dealers within the State and on which tax is paid or has become payable at earlier stage.

They can collect tax separately. No set-off is available on purchases.

(e) Hotels, bars, restaurants and clubs (4-star and above):

Hotels, bars and restaurants with grading of 4-star and above will be required to pay tax at 20% of their actual sale price, if the liquor is purchased from registered dealers within the State and on which tax is paid or has become payable at earlier stage.

If liquor is imported from other States or from outside the country, then in addition to 20% as above, they will be required to pay tax at Schedule rate subject to the limit of MRP x 25/125 of such liquor sold.
They can collect tax in the sale bills. No set-off is available on purchases of liquor.

(f) Taxation of stock as on 30-4-2011:

The tax on sale of liquors in stock as on 30-4-2011 will be as per the new system, discussed above i.e., at 50% of sale price limited to calculation made as per formula of MRP x 25/125. Hotels/ bars, in addition to the above, will be required to pay 5% or 20% as the case may be. In this case set-off will remain available on stock subject to submission of stock statement.

All the dealers, except manufacturers, shall furnish a statement of closing stock of goods mentioned in Entry 1, 2 and 3 of Schedule D to the MVAT Act, 2002 as on 30th April, 2011, in the Proforma appended to the Notification by 31st May, 2011.

5. Refunds — Unwarranted and unreasonable curtailment:

Section 51 of the MVAT Act deals with refunds as per returns. Few important changes can be noted as under:

(a) At present there is time limit on the Department to call for additional information. That could be called within one month of filing of the application.

However the time limit of one month is deleted by present amendment to section 51(2)(a). The result is that the Department will have open ground to call for additional information at any time.

(b) Refund to newly registered dealer:

Clause 51(2)(b) provides that the newly registered dealer can apply for refund after expiry of one year from the end of first year. This provision is sought to be deleted with the effect that they will be able to claim the refund on expiry of year, as any other normal dealer. This can be said to be beneficial to the newly registered dealers.

(c) Inter-state seller — Removal from preferred category:
With a view to give early refunds to the dealers involved in inter-state sales, they were put in preferred category by way of section 51(3)(a)(iv) . Therefore, these dealers could file refund applications as per return period and had not to wait till the end of full year. Now this category is removed with the result that such dealers will be required to claim refunds after the end of year. This will delay refund claims for them.

(d) Exporter — Defined:

Preferred category u/s.51(3)(a) includes exporter. They can file refund application as per the return period. However, the term ‘Exporter’ was not defined and hence a dealer having one export transaction could also file application as exporter. This liberal provision is now sought to be tight-ened. The term ‘Exporter’ is defined by inserting the following explanation.

“Explanation — For the purposes of sub-clause (i), the expression ‘Exporter’ shall mean a registered dealer whose turnover of exports during such period as may be prescribed, is not less than such percentage of the total turnover of his sales as may be prescribed in this behalf.”

The said percentage is prescribed by insertion of Rule 55A(3). According to the said Rule, if export turnover is not less then 50% in previous year or in concerned return period, then the dealer will be considered to be exporter.

(e) Bank guarantee:

Section 51(3)(b) provides for requirement of bank guarantee for granting refund. It also gave power to call for additional information. The clause for calling additional information is deleted and calling for bank guarantee is retained.

(f) Period for grant of refund — Extended:

Section 51(4) provides time limit for grant of refund. At present the limit is six months from the month of receipt of refund application. The said limit is extended to 18 months from the end of the month in which application is received. At present the dealer can get interest u/s.53(1) for delay in grant of refund after expiry of the above time limit of six months. Now this can take place after 18 months. Thus more time to retain the dealer’s money without interest.

The proviso to section 51(4) provides time limit for disposal of applications pending at present. It is sought to be provided that the applications filed up to 31-3-2011 for period up to 31-3-2010 will be disposed of by 30-9-2011. The applications filed up to 31-3 -2011 for period from 1-4-2010 to 31-3-2011 will be disposed of by 30-6-2012.

(g) Time limit for filing refund application — Section 53(7):

As per section 53(7) refund application can be filed within three years from the end of concerned year. Now the time limit is reduced to 18 months. Thus one more curtailment of the dealer’s right. Whereas time for grant of refunds by the Department is enhanced to 18 months from six months, the time limit for dealer is curtailed. This cannot be said to be a fair treatment. There will be many adverse effects on dealers.

The above provision will apply from 2009-10 and the refund applications for 2009-2010 will be required to be filed before 30-9-2011.

6. VAT Audit report — heavy ‘weight’ on dealers:

VAT Audit provision is becoming more and more stringent for dealers. Up till now there is penalty for late filing of report, to be calculated at 0.1% of turnover.

Now section 61(1) is amended to provide that the audit report should be ‘complete’ report.

By Explanation it is provided that the audit report will be deemed to be complete, if all items, certifications, tables, schedules and annexures are filed appropriately and are arithmetically self-consistent. If the report is found to be incomplete, then dealer will be subject to penalty at 0.1% of turnover, as per section 61(2A).

7. Prosecution for false tax invoice:

Sub-sections (1A)(i) and (ii) are inserted in section 74 to provide punishment by way of imprisonment for two years for issuing/producing false tax invoice to defraud revenue. The provision is extended to person who abates aforesaid offence.

In addition to above, there are changes in rate of taxes, few changes in composition schemes, etc. The same are not referred to here for sake of brevity.

shailesh.kwebmaker

VAT Administration vis-à-vis Busines Audit

From 1st April 2005, the Bombay Sales Tax Act, 1959 (BST Act) was abolished and as per national consensus the Value Added Tax system (VAT) was introduced. For that purpose, the Maharashtra Value Added Tax Act, 2002 (MVAT Act) came into operation w.e.f. 1-4-2005. The said new Act has many distinguishing features as compared to the earlier BST Act. One of them is change in the assessment procedure. Under the provisions of the BST Act, assessment of the dealer for each year was mandatory. It is a well-settled position that whatever position might have been shown in the returns, the dealer was entitled to put the last updated position before the assessing authority in the course of assessment. The assessing authority was also under obligation to assess the dealer as per final records produced by the dealer. Therefore, pre-assessment procedures like returns, etc., had not much effect on the final assessment. This was a very good opportunity in the hands of the dealer to get himself assessed as per law and as per books, in spite of the fact that in the returns, etc., correct position might not have been shown.

There is drastic change in the above procedure. Under the MVAT Act, there is no compulsion for carrying out assessment of dealer/s. The same is optional for the Department and if it feels necessary, then only it may take up the assessment, otherwise the position shown in return will be final. Therefore, under the MVAT Act, returns are much more important documents. The dealer has to file returns with absolute care. Normally there will not be any opportunity to correct the situation, as it was under the earlier BST Act where assessment was mandatory. If the Sales Tax Department initiates assessment, then the dealer may be in position to put up his latest position, which was not reflected in the returns. However, if there is no assessment, he will not have such an opportunity and has to remain contended with the position shown in returns.

In the MVAT Act, there is a provision for audit by an independent agency like VAT Audit by CA and Cost Accountant. However, in spite of the same, the Sales Tax Department also wants to supervise the position on its own. Therefore, the Department has brought in the concept of ‘Business Audit’. This is a new concept which has been provided by way of section 22 of the MVAT Act. When this section was originally inserted it had eight (8) sub-sections detailing various aspects of ‘Business Audit’. Subsequently six (6) sub-sections were removed and now there are only two (2) sub-sections. A few important pros and cons of the Business Audit provision can be noted as under:

(1) As stated above, initially all the procedural aspects about the Business Audit were specified in section 22 itself. After removal of such subsections, the only thing remains in section 22 is giving authority for carrying out the Business Audit and the authority of the officer during the Business Audit. Therefore, in relation to other aspects, the Commissioner of Sales Tax has issued Circular bearing no. 25T of 2008, dated 23-7-2008. Thus, a number of procedural aspects has been left to the sweet will of the Commissioner of Sales Tax. As in other cases, the Commissioner of Sales Tax has interpreted the scope of section 22 in wider way than intended by the said section.

(2) The intention of the Legislature in carrying out the Business Audit is to promote compliance of VAT Law by the dealers. Therefore, it is in the nature of guiding the dealers. To serve the real purpose, it is expected that the Business Audit will be carried out for initial year of the dealer, whereby he will be able to note his noncompliance at an early stage and will be able to correct it at the earliest. In fact, it should be at the beginning of the year, so for rest of the year, as well as in future, he will get guided. However, experience shows that the Business Audits are being carried out very late. Like a Business Audit from 2005-06 onwards is being done in 2010-11. This completely demolishes the real purpose of the Business Audit. By such late action, the non-compliance gets accumulated for past number of years and if it is attracting liability, it gets multiplied. The Sales Tax Department should think over making the above provision more dealer friendly.

(3) The Business Audit appears to be a pre-assessment verification of the records. If the Business Audit officer is satisfied with the compliance, there will not be any further action. If he is not satisfied, he will give intimation in form 604 for correcting the position. If the dealer agrees to the same, the Business Audit may be closed. If the dealer does not agree, the officer may initiate assessment.

In the above whole process, it is seen that the Sales Tax Department is using the provision only to find out additional liability. It seems to be a misunderstanding of the provision by the Department. The intention of the Legislature is that the Business Audit should be carried out for promoting compliance of the provisions of the MVAT Act. The provisions include various beneficial provisions in favour of dealers, like set-off. Therefore, if in the course of the Business Audit, the officer finds out any short claim of set-off by the dealer, he is duty bound to give opportunity to the dealer to correct the said position and grant additional set-off. However, no such instructions are given in the Circular, nor is it done practically. It shows that the provision is being used in unfair manner and against the real purpose of the Business Audit provision.

(4) In the Circular No. 25T of 2008, the Commissioner of Sales Tax has given certain aspects of scope of audit. Some of the items mentioned cannot fall in the scope of Business Audit under the MVAT Act. A few of them are as under:

(a) It is mentioned that the Business Audit Officer will be entitled to look into other Acts also like Profession Tax Act. This appears to be incorrect, as Profession Tax Act does not refer to the MVAT Act for procedural aspects and hence such substantial provision of the MVAT Act cannot be used for the Profession Tax Act.

(b) The provision in section 22(5) suggests that the dealer should afford necessary facility for inspection of books, etc. Therefore, there cannot be compulsion about any of the matters. In any case, the Business Audit Officer cannot have power of Civil Court about proof of facts by affidavit, summoning and enforcing the attendance, etc. This is so because the Business Audit Officer is not assessing the dealer, so as to pass final order of liability. He is only verifying the records for looking into compliance by the dealer. If after noticing irregularities, he wants to initiate assessment and to decide the liability as per statutory provision, then he may get the above powers for determining the facts before passing order of liability. Therefore, granting such powers, in the course of Business Audit, appears to be pre-mature and excessive.

(c) In the Circular No. 25T of 2008, it is mentioned that the Business Audit Officer can also come without intimation if he wishes to carry out surprise audit. This power also appears to be beyond the scope of section 22. Whenever the Sales Tax Department wants to carry out surprise checks, there are separate powers of investigation u/s. 64 of the MVAT Act. The Sales Tax Department can utilise the said powers for surprise visits. If section 22 powers of Business Audit are used for such purpose, it will amount to circumventing requirements of section 64. As per section 64, a surprise visit can be given, if there is ‘reason to believe’ for tax evasion, etc. Thus, there is burden upon the Sales Tax Department to record the reasons about tax evasion and then to take out surprise visit. There are cases where investigation actions have been struck down by Courts, if it is established that the investigation action is without discharging burden of establishing ‘reason to believe’. Now, because of above mentioned Circular, investigation action may take place u/s. 22, without discharging the burden of establishing ‘reason to believe’. This appears to be overuse or misuse of powers granted u/s. 22. This is also contrary to intention of the Legislature.

(d) In the above Circular, it is also mentioned that wherever necessary, the Business Audit Officer can seek intervention by the Investigation Branch. Thus, this again is a situation of avoiding necessary parameters of section 64 and beyond the scope of section 22 of the MVAT Act. It is expected that such unintended and unauthorised instructions should be withdrawn, if the provision is really to be used for the intended purpose i.e., guiding the dealers.

There are many other aspects for which detailed deliberations need to take place. At this juncture, we just wish that the provision should be administered in a fair manner and within its legislated scope.

shailesh.kwebmaker

“Overlap of Indirect Taxes” How far justified?

Introduction

What is overlapping?
Overlapping can be said to take place when service tax and sales tax are both levied on the same amount.

The issue of overlapping arises because the divisions of taxation power in the Constitution are not watertight compartments. A transaction may have many aspects wherein some aspects fall within the domain of the Central list and other aspects fall in the State list. Taking clue of respective aspects involved in a transaction, the Central/State authority try to levy tax on gross/ higher amount of the transaction, which results in levy of both the taxes – Central and State (i.e., service tax and sales tax) on the same amount. Whether, overlapping is permissible or not is a debatable issue. And the issue can be said to be confusing. There are judgments saying service tax and VAT cannot be levied on the same amount. Reference can be made to the judgment of the Supreme Court in the case of Bharat Sanchar Nigam Ltd. (145 STC 91) (SC) in which the Supreme Court has observed as under:

“88. This does not however allow State to entrench upon the Union list and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366(29A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax. As was said in Larsen & Toubro v. Union of India, (1993) 1 SCC 365;

“The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of materials involved in the execution of the works contract only can be included in the value of the goods.”

89. For the same reason the Centre cannot include the value of the SIM cards, if they are found ultimately to be goods, in the cost of the service. As was held by us in Gujarat Ambuja Cements Ltd. v. Union of India, (2005) 4 SCC 214, 228:

“This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity. Although generally speaking, a liberal interpretation must be given to taxing entries, this would not bring within its purview a tax on subject-matter which a fair reading of the entry does not cover. If in substance, the statute is not referable to a field given to the State, the Court will not by any principle of interpretation allow a statute not covered by it to intrude upon this field.”

From the above observations of the Supreme Court of India, it appears that though both service tax and VAT can be levied on the same transaction, there should not be overlapping and amount subjected to respective taxes should not exceed more than the total amount of the transaction.

However reference can also be made to the following observations of the Supreme Court in case of Tamil Nadu Kalyana Mandapam Assn. v. Union of India and Others, (135 STC 480) (SC).

“43. The concept of catering admittedly includes the concept of rendering service. The fact that tax on the sale of the goods involved in the said service can be levied, does not mean that a service tax cannot be levied on the service aspect of catering. Mr. Mohan Parasaran, learned Senior Counsel for the appellant, submitted that the High Court before applying the aspect theory laid down by this Court in the case of Federation of Hotel & Restaurant Association of India v. Union of India ought to have appreciated that in that matter Article 366(29A)(f) of the Constitution was not considered which is of vital importance to the present matter and that the High Court ought to have differentiated the two matters. In reply, our attention was invited to paragraphs 31 and 32 of the judgment of the High Court in which the service aspect was distinguished from the supply aspect. In our view, reliance placed by the High Court on Federation of Hotel & Restaurant Association of India and, in particular, on the aspect theory is, therefore, apposite and should be upheld by this Court. In view of this, the contention of the appellant on this aspect is not well-founded.

44. It is well settled that the measure of taxation cannot affect the nature of taxation and, therefore, the fact that service tax is levied as a percentage of the gross charges for catering cannot alter or affect the legislative competence of Parliament in the matter.”

From the above it appears that the respective authorities can levy taxes on gross amount and it will not be a violation of Constitutional provisions. In fact recently the Karnataka High Court has also dealt with the issue of overlapping in the case of M/s. Sasken Communication Technologies Ltd. v. The Deputy Commissioner of Sales Taxes (Aud-52), DVO-5 (W.A. Nos. 90-101/2011, dated 15-4-2011) and fairly observed that the issue is very vexed and should be resolved by the Court on particular facts of the case. The relevant observations are as under:

“30. Wherever legislature powers are distributed between the Union and the States, situations may arise where the two legislative fields might apparently overlap. It is the duty of the Courts, however difficult it may be, to ascertain to what degree and to what extent, the authority can deal with matters falling within these classes of subjects exists in each Legislature and to define, in the particular case before them, the limits of the respective powers. It could not have been the intention that a conflict should exist; and, in order to prevent such a result the two provisions must be read together, and the language of one interpreted, and, where necessary modified by that of the other.”

From the above observations, it seems that the issue about overlapping will continue to exist till these taxes are merged (like GST) or the Constitution provisions are made absolutely clear.

Whether overlapping affects validity of legislation?

Though overlapping has become an order of day, legislations are held to be valid in spite of overlapping. Reference can be made to the judgment of the Supreme Court in the case of Govind Saran Ganga Saran v. Commissioner of Sales Tax and Others, (60 STC 1) (SC), wherein it is observed that the law to be valid, must fulfil the criteria discussed in the following para of the judgment:

“The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.”

Therefore when measure of tax is not clear, it can be said that there is bad taxation and it can be challenged as invalid. In relation to levy of service tax and sales tax there are so many transactions in day-to-day practice where the measure of tax is not clearly ascertainable. Examples can be about levy of tax on hotels and restaurants, construction activity, repair and maintenance, works contracts, softwares and many others.

Whether overlapping justified
In light of the above judicial pronouncements a mixed picture emerges. Howsoever, avoiding the overlapping is very much necessary. Due to confusion of overlapping it is seen that the concerned dealers/persons charge both service tax and sales tax on full amount. This not only results in unjustified and undue enrichment to respective Governments, but also increases cost to consumers and ultimately leads to inflation. Though we are hopeful that the implementation of GST will resolve the issue, but such a hope is dimming day by day as the implementation itself is under cloud, getting postponed again and again.

Whatever may be the necessities of collecting taxes, the Government at Centre as well as at State level must ensure that consumers should not suffer. It is bounded duty of respective Governments to avoid menace of double taxation and, therefore, to come out with clear guidelines about taxation position for themselves so the tax is not levied on more than total amount of a transaction. In the circumstances, pending implementation of GST, it is desirable that the issue should be resolved by other legal/administrative measures.

May we expect an early resolution of this overlapping position?

shailesh.kwebmaker

VAT on Builders and Developers

Introduction

The historical background of works contract is very interesting. In a landmark judgment in the case of Gannon Dunkerley & Co. (9 STC 353) the Supreme Court held that it is the transaction of ‘sale’ within the meaning of the Sale of Goods Act, which can be covered by Sales tax legislations. It was held that the transactions of sale, which are completed by delivery, are sale transactions as per the Sale of Goods Act and such transactions can only be taxable under sales tax laws. Where there is a composite contract, like supply of materials and application of labour, it becomes a works contract transaction and cannot be covered by Sales tax legislations. After the above judgment, for number of years, the transactions of works contracts remained outside the scope of Sales tax legislations. It is in the year 1983, the Constitution was amended (46th Amendment), whereby, for enabling levy of Sales tax, deemed sale category was inserted. This was done by insertion of clause (29A) in Article 366 of the Constitution of India. One of such deemed sales category is ‘works contract’ transaction.

After getting powers to levy Sales tax on works contract transactions, States including Maharashtra made legislations for levy of Sales tax on works contract transactions. In Maharashtra, there was a separate Maharashtra Works Contract Act, 1989. Under the above Act, an issue arose, as to whether tax can be attracted on builders & developers, who come up with their own projects and while the construction is in progress, enters into agreement for sale of premises. In the DDQs issued at that time, it was held that such agreements cannot be liable under the Works Contract Act. Reference can be made to the DDQ in case of Unity Developer & Paranjape Builders (DDQ 1188/C/40/ Adm-12, dated 10-3-1988). It was held that there is no employer-contractor relationship between buyer of premises and builder. G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT Similar position is also repeated in DDQ in the case of M/s. Rehab Housing Pvt. Ltd. & Larsen & Toubro Ltd. (JV) (WC-2003/ DDQ-11/Adm-12/B-276, dated 28-6-2004). In this DDQ, the issue was about constructing tenements for contractee, where price was composite for land and construction. It was held that this is a contract for immoveable property and not covered by the Works Contract Act.

Change in situation

From 1-4-2005, the Works Contract Act is merged into the MVAT Act, 2002 and works contract transactions are covered by the said MVAT Act, 2002. However, still the above situation prevailed and there was no attempt to levy tax on builders & developers. However, in 2005, the Supreme Court delivered judgment in case of K. Raheja Construction (141 STC 298) (SC). In this case, noting that there is separate value for land and separate value for construction, the Supreme Court held the developer as liable to works contract. After the judgment in the case of K. Raheja Construction (141 STC 298) (SC), the VAT authorities held a view that ‘Under Construction Contracts’ are liable to VAT as works contract. The definition of works contract was introduced in the MVAT Act, 2002 on 20-6-2006. Thereafter, the Commissioner of Sales Tax issued Circular 12T of 2007, dated 7-2-2007 explaining that builders & developers, coming up with their own project but entering into agreements for sale of premises, when the construction is under progress, will be works contract transactions and accordingly liability as works contract will be required to be discharged under the MVAT Act, 2002. It was further explained that if the agreement is after completion of construction, then such agreements will not be covered.

In other words, ‘under construction contracts/ agreements’ were stated to be taxable under the MVAT Act, 2002.

Matter before Bombay High Court After the above development, writ petitions were filed before the Bombay High Court challenging the above interpretation and proposed levy. The High Court has recently decided the said controversy by way of judgment in the case of the Maharashtra Chamber of Housing Industry & Ors. (51 VST 168). The short facts and gist of arguments before the High Court can be noted as under: On behalf of petitioners (a) The amendment in definition of ‘sale’ is unconstitutional, if it is contemplating to levy tax on immovable property. (b) It was shown that the provisions refer to conveyance of land or interest in land, which means immovable property. It was also argued that in works contract the property should pass while executing the contract and not after completion. In case of premises, property passes after construction and conveyance and hence it is a sale of immovable property and not execution of works contract. (c) The works contract contemplates two elements i.e., labour and materials. If third element like land is involved, there is no works contract under Sales tax laws. (d) It was argued that there is no transfer of property to individual buyer of premises, but it is transferred to society by conveyance. Under the above circumstances, no works contract for individual buyers. Provisions of the Maharashtra Ownership Flats (Regulations of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA) and Model Agreement thereunder, were also referred to. (e) Unlike in the case of K. Raheja (cited supra), in case of agreement under MOFA, there is no separate price for land/construction and hence transaction cannot amount to works contract. (f) Under the MVAT Rules, 2005, there is Rule 58(1A) to grant deduction towards cost of land.

However, deduction is restricted to 70% of contract value. It was argued to be unconstitutional, as, if land value is exceeding 70%, it will amount to levy of tax on land value, which is not permissible.

On behalf of Government

(a) There is no restriction that if land is involved, the State cannot isolate sale of goods from such contract.

(b) There can be various species of contract and ‘under construction agreement for premises’ is one such specie.

(c) The main argument of the Government was that as per the MOFA Act and Model agreement, buyer gets protection from various aspects like builder cannot change plan, no mortgage of land, etc. Therefore, citing stamp duty judgments, it was argued that construction, after entering into agreement, till completion, will amount to works contract.

(d) Rule 58(1A) is only for measurement of tax and hence not unconstitutional.

Judgment of High Court

The High Court, after considering the above arguments, held that under construction contract is works contract and VAT can be attracted on the same. The main thrust of judgment is that by making agreement under MOFA, buyer gets some interest in the said flat/premises. The Construction thereafter is therefore works contract. The reasoning of the High Court can be noted as under:

“29. In enacting the provisions of the MOFA, the State Legislature was constrained to in-tervene, in order to protect purchasers from the abuses and malpractices which had arisen in the course of the promotion of and in the construction, sale, management and transfer of flats on ownership basis. The State Legislature has imposed norms of disclosure upon promoters. The Act imposes statutory obligations. The manner in which payments are to be made is structured by the Legislature. As a result of the statutory provisions, an agreement which is governed by the MOFA is not an agreement simplicitor involving an ordinary contract under which a flat purchaser has agreed to take a flat from a developer, but is a contract which is impressed with statutory rights and obligations. The Act imposes restrictions upon a developer in carrying out alterations or additions once plans are disclosed, without the consent of the flat purchaser. Once an agreement for sale is executed, the promoter is restrained from creating a mortgage or charge upon the flat or in the land, without the consent of the purchaser. The Act contains a specific stipulation that if a mortgage or charge is created without consent of purchasers, it shall not affect the right and interest of such persons. There is hence a statutory recognition of the right and interest created in favour of the purchaser upon the execution of a MOFA agreement.

Having regard to this statutory scheme, it is not possible to accept the submission that a contract involving an agreement to sell a flat within the purview of the MOFA is an agreement for sale of immovable property simplicitor. The agreement is impressed with obligations which are cast upon the promoter by the Legislature and with the rights which the law confers upon flat purchasers.”

Holding the above view, the High Court held that ‘Under Construction Contract/Agreements’ will be covered under the MVAT Act, 2002.

Conclusion

Therefore, as on today the State can levy tax on under construction agreements. However, matter is subject to the Supreme Court. It can be noted here that similar controversy in relation to the Karnataka State is already before the larger Bench of the Supreme Court in the case of Larsen & Toubro Limited and Another v. State of Karnataka and Another, (17 VST 460) (SC). Therefore, the ultimate fate will depend upon the Supreme Court judgment.

shailesh.kwebmaker

Sale in course of import vis-à-vis sale from duty-free shop

As per Article 286 of the Constitution of India, transactions taking place in the course of import and export are made immune from levy of sales tax. In pursuance of the said Article the transactions of sale/ purchase in course of import/export are defined in section 5 of the CST Act, 1956. The transaction of sale in course of import is defined in section 5(2) of the CST Act, 1956. The said sub-section is reproduced below.

“S. 5. When is a sale or purchase of goods said to take place in the course of import or export.

(2) A sale or purchase of goods shall be deemed to take place in the course of the import of the goods into the territory of India only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the Customs frontiers of India.”

It can be seen, from the above, that there are two limbs. As per the first limb, the sale/purchase occasioning the movement of goods from foreign country is considered to be in the course of import. Therefore, the transaction of direct import is covered by this category. In addition to the above, there is scope to cover further transaction also as in the course of import under this limb.

The second limb covers transactions which are effected by transfer of documents of title to goods before the goods cross the Customs frontiers of India.

In a recent judgment, the Supreme Court had an occasion to specify the scope of the above section. Reference can be made to the judgment in the case of M/s. Hotel Ashoka v. Assistant Commissioner of Commercial Taxes & anr., (Civil Appeal No. 2560 of 2010 decided on 3-2-2012).

Facts of the case

The assessee (appellant) was M/s. Hotel Ashoka, a hotel managed by India Tourism Development Corporation Limited (ITDCL). The assessee had duty-free shops at international airports in India. At duty-free shops, the assessee sold several articles including liquor to foreigners and also to Indians going abroad or coming to India by air. The issue arose, under Karnataka Sales Tax Act, in respect of dutyfree shop at international airport at Bengaluru. For sales effected at the said place, the assessee took a stand that no tax was payable under the sales tax laws, as the goods were sold before importing the goods or before the goods had crossed the Customs frontiers of India. The sales tax authorities levied sales tax and raised demand. A writ petition was filed before the Karnataka High Court. However, the High Court rejected the writ petition holding it to be not maintainable on the ground of availability of alternative remedies. The matter came before the Supreme Court.

In respect of maintainability the Supreme Court observed that since the SLP was already admitted and the matter pertained to the year 2004-05, it would not be in the interest of justice to relegate the assessee to statutory authorities especially when the legal position is very clear and the law is also in favour of the appellant.

Judgment on merits
On merits, the Supreme Court examined the legal position. In para-18, the Supreme Court observed as under:

“18. It is an admitted fact that the goods which had been brought from foreign countries by the appellant had been kept in bonded warehouses and they were transferred to duty-free shops situated at international airport of Bengaluru as and when the stock of goods lying at the duty-free shops was exhausted. It is also an admitted fact that the appellant had executed bonds and the goods, which had been brought from foreign countries, had been kept in bonded warehouses by the appellant. When the goods are kept in the bonded warehouses, it cannot be said that the said goods had crossed the Customs frontiers. The goods are not cleared from the Customs till they are brought in India by crossing the Customs frontiers. When the goods are lying in the bonded warehouses, they are deemed to have been kept outside the Customs frontiers of the country and as stated by the learned senior counsel appearing for the appellant, the appellant was selling the goods from the duty-free shops owned by it at Bengaluru international airport before the said goods had crossed the Customs frontiers.”

Further in para 23 and 24 the Supreme Court has observed as under:

“23. Looking to the aforestated legal position, it cannot be disputed that the goods sold at the duty-free shops, owned by the appellant, would be said to have been sold before the goods crossed the Customs frontiers of India, as it is not in dispute that the duty-free shops of the appellant situated at the international airport of Bengaluru are beyond the Customs frontiers of India i.e., they are not within the Customs frontiers of India.”

“24. If this is the factual and legal position, in our opinion, looking to the provisions of Article 286 of the Constitution, the State of Karnataka has no right to tax any such transaction which takes place at the duty-free shops owned by the appellant which are not within the Customs frontiers of India.”

The Sales Tax Department contented that the sale, to be in course of import, should take place beyond the territories of India and not within the geographical territory of India. Further, it was also contented that there was no evidence about sale by transfer of documents of title to goods for effecting the sales before the goods have crossed Customs frontiers of India. Both the objections were rejected by the Supreme Court observing as under:

“30. They again submitted that ‘in the course of import’ means ‘the transaction ought to have taken place beyond the territories of India and not within the geographical territory of India’. We do not agree with the said submission. When any transaction takes place outside the Customs frontiers of India, the transaction would be said to have taken place outside India. Though the transaction might take place within India but technically, looking to the provisions of section 2(11) of the Customs Act and Article of the Constitution, the said transaction would be said to have taken place outside India. In other words, it cannot be said that the goods are imported into the territory of India till the goods or the documents of title to the goods are brought into India. Admittedly, in the instant case, the goods had not been brought into the Customs frontiers of India before the transaction of sales had taken place and, therefore, in our opinion, the transactions had taken place beyond or outside the Customs frontiers of India.”

“31. In our opinion, submissions with regard to sale not taking effect by transfer of documents of title to the goods are absolutely irrelevant. Transfer of documents of title to the goods is one of the methods whereby delivery of the goods is effected. Delivery may be physical also. In the instant case, at the duty-free shops, which are admittedly outside the Customs frontiers of our country, the goods had been sold to the customers by giving physical delivery. It is not disputed that the goods were sold by giving physical possession at the duty-free shops to the customers. Simply, because the sales had not been effected by transfer of documents of title to the goods and the sales were effected by giving physical possession of the goods to the customers, it would not mean that the sales were taxable under the Act. Thus, we do not agree with the aforestated submissions made by the learned counsel appearing for the Revenue.”

Thus, the Supreme Court has finally decided the scope of section 5(2) of the CST Act, 1956.

Conclusion
This judgment can be said to be a comprehensive judgment deciding the scope of section 5(2) of the CST Act, 1956. It has resolved the issue once for all. The judgment will also be useful in respect of sale effected from bonded warehouses.

shailesh.kwebmaker

Sale Price in Works Contract vis-à-vis Cost plus Gross Profit Method

Introduction
Works contract is a composite transaction where supply of materials and supply of labour are both involved. As held by Hon’ble Supreme Court in the case of Builders Association of India vs. UOI (73 STC 370), the works contract transaction can be notionally divided into supply of materials and supply of labour. It is further held that the sales tax/VAT can be levied only to the extent of value of goods.

A further question arose as to how value of the goods can be found out from composite value of the contract. The issue has again been dealt with by the Supreme Court in the case of Gannon Dunkerly & Co. vs. State of Rajasthan (88 STC 204). In relation to finding out value of goods, Supreme Court has observed as under;

“The aforesaid discussion leads to the following conclusions:

(1) to (3)……

(4) The tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract falling within the ambit of article 366(29-A)(b) is leviable on the goods involved in the execution of a works contract and the value of the goods which are involved in the execution of works contract would constitute the measure for imposition of the tax.

(5) In order to determine the value of the goods which are involved in the execution of a works contract for the purpose of levying the tax referred to in article 366(29-A)(b) it is permissible to take the value of the works contract as the basis and the value of the goods involved in the execution of the works contract can be arrived at by deducting expenses incurred by the contractor for providing labour and other services from the value of the works contract.

(6) The charges for labour and services which are required to be deducted from the value of the works contract would cover (i) labour charges for execution of the works, (ii) amount paid to a sub-contractor for labour and services, (iii) charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract, (iv) charges for planning, designing and architect’s fees, and (v) cost of consumables used in the execution of the works contract, (vi) cost of establishment of the contractor to the extent it is relatable to supply of labour and services, (vii) other similar expenses relatable to supply of labour and services, and (viii) profit earned by the contractor to the extent it is relatable to supply of labour and services.

(7) To deal with cases where the contractor does not maintain proper accounts or the account books produced by him are not found worthy of credence by the assessing authority, the Legislature may prescribe a formula for deduction of cost of labour and services on the basis of a percentage of the value of the works contract but while doing so, it has to be ensured that the amount deductible under such formula does not differ appreciably from the expenses for labour and services that would be incurred in normal circumstances in respect of that particular type of works contract. It would be permissible for the Legislature to prescribe varying scales for deduction on account of cost of labour and services for various types of works contract.

(8) While fixing the rate of tax, it is permissible to fix a uniform rate of tax for the various goods involved in the execution of a works contract, which rate may be different from the rates of tax fixed in respect of sales or purchase of those goods as a separate article.”

Determination of sale price in works contract
From the above observations of the Supreme Court, it is clear that value of the goods on which sales tax can be levied is to be arrived at by taking contract value as the base. From the contract value, labour portion can be deducted as narrated above and where determination of labour charges is not possible, it is to be arrived at by taking standard deduction as may be prescribed by the government.

Cost plus gross profit method
In the present controversy about levy of tax on builders and developers, one issue which was hotly discussed was about adopting cost plus gross profit method. One view was that, it is not mandatory to start from contract value and take the deductions for labour charges to arrive at value of goods. As per the said view, the value of the goods can be arrived at by taking cost price of the materials involved and adding gross profit to the same. In other words, the aggregate of cost of the goods involved and gross profit margin on the same will constitute value of goods for levy of tax.

The Commissioner of Sales Tax, Maharashtra State, issued Circular bearing no. 18 T of 2012 dated 26.9.2012. In this circular, Commissioner of Sales Tax, amongst others, clarified that the working as per cost plus gross profit is not the statutory method and will not be admissible. It was clarified that the working should be as per statutory methods, as mentioned in the circular i.e. as per rule 58 read with rule 58(1A) of the MVAT Rules, 2005 or as per the composition schemes. In other words, it was effectively clarified that the cost plus gross profit method will not be admissible.

Writ Petition before Bombay High Court
A Writ Petition was filed before Hon’ble Bombay High Court by the Builders Association of India (Writ Petition (LODG) No. 2440 of 2012). Amongst others, it was challenged that the circular disallowing cost plus gross profit method is unconstitutional, as well as ultra virus. The plea was that the same method should be allowed to work out the value of goods. Hon’ble Bombay High Court has decided the said Writ Petition vide judgment dated 30th October, 2012. In respect of the above plea about the method of working out value of goods for levy of tax, Hon’ble Bombay High Court has observed as under;

“17. Essentially, what rule 58(1A) does is to provide a particular modality for determining the value of goods involved in the execution of construction contracts where an interest in land or land is also to be conveyed under the contract. The provisions of rule 58(1A) are not under challenge. Where the Legislature has an option of adopting one of several methods of determining assessable value, it is trite law that the legislature or its delegate can choose one among several accepted modalities of computation. The legislature while enacting law or its delegate while framing subordinate legislation are legitimately entitled to provide, in the interest of uniformity, that a particular method of computation shall be adopted. So long as the method which has been adopted is not arbitrary and bears a reasonable nexus with the object of the legislation, the Court would not interfere in a statutory choice made by the legislature or by its delegate. In the present case, rule 58(1A) mandates on how the value of goods, involved in the execution of a construction contract at the time of the transfer of property in the goods is to be determined in those cases where contract also involves a transfer of land or interest in land. The Circular dated 26.9.2012 does no more than specify the mandate of the statute. The Circular has not introduced a condition by way of a restriction which is not found in the statute. Plainly, rule 58(1A) does not permit the developer to take recourse to a method of computation other than what is specified in the provision. Hence, the Circular dated 6th September 2012 was only clarificatory.”

Observing as above, at the end of the judgment, Hon’ble High Court has held that the circular is not ultra virus.

In view of above, it can be said that effectively Hon’ble High Court has put a seal of approval on the proposition made in the circular. The contractor has to find out the value of goods as per the statutory provisions and cannot adopt other methods like cost plus gross profit etc.

Conclusion

The above judgment is in relation to builders and developers. However, the legal position discussed is about validity of the method for finding out the value of goods for levy of VAT. From the judgment, it is clear that no method other than statutory method can be adopted for working out the value of goods. Therefore, though the judgment is in relation to builders and developers, it will govern the position in relation to other contracts also. In other words, even in relation to other contracts, it may be difficult to adopt cost plus gross profit method and the working may have to be done as per the statutory methods.

shailesh.kwebmaker

Certain Important Amendments in MVAT Act and Rules

Introduction

Amendments are effected in the MVAT Act, 2002 and the MVAT Rules, 2005 as a consequence to budget proposals for the year 2012-13. Though there are a number of amendments, few important amendments, having a wide effect are noted below.

Amendments in MVAT Act, 2002

(a) Levy of purchase tax and consequential changes

Under the MVAT Act, 2002, up till today there was no scheme for levy of purchase tax. However, now the same has been introduced by inserting section 6A, and section 6B in the MVAT Act, 2002. As per section 6A purchase tax is provided on cotton, purchased from unregistered dealer and which is branch-transferred out side the state or used in manufacture of tax-free goods or taxable goods, where such manufactured goods are branch-transferred out side the state. As per section 6B, purchase tax is provided on oil seeds in the same circumstances, as discussed in relation to cotton as above.

The rate of purchase tax will be the same as mentioned in the schedule i.e., as applicable on the sale of above goods from time to time. The purchase tax provision of section 6B has come into effect from 1-5-2012 and the provision of section 6A will come into force as and when a date is notified for the said purpose.

The purchase tax so levied will be eligible for set-off as per the scheme of set-off.

Consequential amendments have also been made in section 3(2), 3(4) and s.s 3(5A) has been newly inserted. This is to provide liability for registration based on purchase turnover, which is liable to purchase tax as per the above sections 6A and 6B.

(b) Late fee for delayed filing of return

S.s (6) has been inserted in section 20 of the MVAT Act, 2002, whereby late fee of Rs.5000 is prescribed in case of delayed filing of return. It may be remembered that at present, there is section 29(8) providing for levy of penalty in case of delayed filing of return. However, in case of Vasu Enterprises (Writ petition No. 1451 of 2011, dated 8-9-2011) Bombay High Court held that penalty u/s.29(8) cannot be levied without hearing opportunity. This would require the Sales Tax Department to issue show-cause notice in each case and to pass a speaking order. It appears that, to avoid above exercise, this concept of late fee has been introduced. The said late fee amount will be required to be paid before the delayed return is uploaded. The provision has not come into effect till today, but will be brought into operation by issue of Notification. The penalty provision of section 29(8) will also become inoperative from such date.

The above provision shows harsh approach of the Department towards dealers. There can be several reasons for delay. Some of them will be beyond the control of the dealer. Under the above circumstances, levying mandatory late fee of Rs.5000 is not justified. Further, a dealer may not be liable to pay tax but will be liable to pay late fee, simply because the return is delayed. The constitutional validity of such levy is also debatable as there cannot be said to be ‘quid pro quo’ for providing such a fees.

(c) Mandatory part payment

As per present appeal provisions, in section 26 of the MVAT Act, 2002, the litigant dealer is entitled to get stay order upon filing appeal. The Appellate Authority has discretionary power to fix suitable amount of part payment as a condition for grant of stay. Now a new proviso has been added in section 26(6). By this proviso, it is provided that if the matter has been adjourned on 3 occasions on the request of the appellant or the appellant has failed to attend on 3 occasions, then the part payment should become 15% of the disputed dues or Rs.15 crore, whichever is less. Thus, the appellant will be required to make good the difference between earlier part payment and amount calculated as above. If such payment is not made, then the stay will come to an end and the disputed demand will be open for recovery. Thus, one more strict provision has been introduced.

The above provision will not apply to appeals under the BST Act, 1959. However, for VAT appeals the dealers will be required to be more attentive. It can also be noted that when the appeal is being adjourned, it should be carefully seen whether the adjournment is on behest of the appellant or on account of the Department. The factual position should get recorded accordingly in proceeding sheet, to avoid unnecessary counting of number of adjournments.

(d) Appeals to High Court

As per section 27, appeals can be filed before the Bombay High Court out of order passed by the MST Tribunal. Now, by insertion of section 26A, it is provided that the Commissioner will have power to notify monetary limit for filing appeals before the Bombay High Court. The provision is similar to such provision under the Income-tax Act. It is clarified that such non-filing of appeals due to monetary limits, will not prejudice subsequent cases. This provision is effective from 1-5-2012.

(e) Penalty for remaining unregistered

Section 29(2A) has been inserted in the MVAT Act, 2002 from 1-5-2012, by which penalty is provided for remaining unregistered dealer. The said penalty can apply for unregistered period after the date of coming into effect of above section i.e., 1-5-2012. The said penalty is 100% of the amount of tax payable during unregistered period. However, it will be discretionary qua levy as well as qua quantum in view of judgment of the Bombay High Court in case of Ankit International (46 VST 1).

(f) Tax collection at source (TCS)

A novel concept of TCS has been introduced in the MVAT Act, 2002 by insertion of section 31A.

TCS has been provided in the following two eventualities:

(i) When right for excavation of sand is auctioned. The notified person, auctioning the right will be liable to collect TCS.

(ii) The other eventuality is that the notified person having temporary possession or control over the goods, will be required to collect TCS.

Though, the provision has come into effect, the actual Notification notifying the persons and rate of TCS has still not been issued, therefore the provision is practically still not effective.

It can be seen that there is no provision for lesser collection or no collection, etc. Therefore, even if the buyer, from whom TCS is to be effected, is not liable to pay tax, still will be required to pay the TCS. Therefore, the provision can be claimed to be unconstitutional.

Certain important changes in MVAT Rules, 2005 Important changes have been effected by Notification dated 1-6-2012.

(a) Returns for unregistered period

As per section 20(1) registered dealers are liable to file returns i.e., returns are required to be filed from effective date of registration. However, now for unregistered period also returns are provided. For this purpose Rule 18(1) has been substituted. As per the said sub-rule, quarterly returns are prescribed for unregistered period and the last return from start of the quarter till date of registration. Thereafter the returns will be as a registered dealer. Of course, the returns for unregistered period can be filed only after getting registration.

The above provision appears to be not in consonance with provisions of section 20(1). However, for the sake of compliance, dealers will be required to file the returns for unregistered period also. It is expected that no late fee will be applicable in such case.

(b) Set-off on natural gas

In Rule 53, sub-rule (1A) has been inserted. By this new sub-rule 3% reduction is provided in respect of calculation of set-off on purchase of natural gas. This reduction will apply in the specified circumstances given in the rule. The language of the rule is not very clear. It appears that except where the natural gas is resold, the reduction will apply.

(c) Reduction in respect of branch transfer [Rule 53(3)]

Vide Notification dated 31-3-2012 the rate of reduction in case of branch transfer [rule 53(3)] has been enhanced from 2% to 4%. This is effective from 1-4-2012.

(d) Due date for submission of audit report in Form 704 (Rule 66)
Rule 66 has been amended so as to provide that audit report (Form 704) shall be submitted within eight months from the end of financial year. Earlier the due date for submission was within 10 months. (Thus the audit report for financial year 2011-12 will be required to be submitted by 30th November 2012.)

(e) Preservation of books of account, registers, etc. (Rule 68)

The books of account and other records, as required to be preserved u/r 68, will have to be preserved now for eight years from the expiry of financial year to which they relate. (Earlier these records were required to be preserved for a period of six years.)

Conclusion

There are many other amendments like changes in rate of tax, rules regarding forms for TCS, etc. However, for sake of brevity all these are not discussed here.

shailesh.kwebmaker

Input Tax Credit vis-à-vis Tax Payment by Vendor

Introduction

Input Tax Credit (Set-off) is the back bone of an efficient VAT system. Therefore, an unambiguous mechanism of input tax credit is necessary to avoid cascading effect of taxes. The Maharashtra Value Added Tax Act, 2002 (MVAT Act) contains a well-codified scheme of set-off by way of section 48 and Rules.

As per section 48(2) of the MVAT Act, a purchasing dealer is entitled to claim set-off subject to production of valid tax invoice containing declaration as specified in Rule 77. The declaration, amongst others, specifies that the vendor has paid tax or shall pay tax on the sale of goods described in the said tax invoice. However, there is section 48(5) and its interpretation is a subject-matter of dispute. The Sales Tax Department has taken a view that set-off will be granted to the extent of tax actually received in the Government treasury on the same goods in spite of production of tax invoice. Section 48(5) reads as under:

“48. Set-off, refund, etc.

Similar provision existed under the BST Act also [section 42(3)] and the said section was interpreted by the Larger Bench of the Tribunal in the case of Saujesh Chemicals (S.A. No. 1109 of 2007 and 1701 of 2003, dated 15-12-2007). In this judgment the Larger Bench held that the set-off will be governed by the said section and the setoff will be available to the extent of tax actually paid in the treasury. The arguments about constitutional validity of such provision could not be made before the Appellate Tribunal as the same cannot be entertained by the Tribunal. However, the Tribunal has held that the responsibility of determining tax actually paid in the Government treasury is on the Department.

Recently the Sales Tax Department has come out with information that many dealers under VAT have not paid taxes. Therefore, they are contemplating disallowance of set-off to the purchasers. There is also allegation that these transactions are hawala transactions.

In light of the above scenario, certain writ petitions were filed before the Bombay High Court. The said writ petitions came up for hearing and they have been now decided. These writ petitions can be divided in two parts:

One set of writ petitions

In one set of writ petitions the Department made allegation about purchases being hawala purchases. The High Court, therefore, held that unless the fate of set-off is decided by way of verification and assessment, no challenge to validity of section 48(5) can be maintained. In other words, the writ petitions were held to be premature and hence were disposed of as dismissed. For this purpose reference may be made to the judgments in the case of Premium Paper and Board Industries Ltd. v. The Joint Commissioner of Sales Tax, Investigation-A & Ors. (W.P. No. 347 of 2012 dated 30-4-2012) and other matters.

Other set — Validity of section 48(5) on merits

The other set of writ petitions was in the case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur v. The State of Maharashtra & Ors., (W.P. No. 33 of 2012, dated 11-5-2012) and others.

In these cases there was no allegation of hawala transactions. The dealer had purchased goods from a registered dealer supported by tax invoice and claimed refund. However, refund was disallowed on the ground that the vendors had not paid the tax.

In this case the High Court heard the matter about constitutional validity of section 48(5) on merits. The gist of submission of the petitioners can be noted as under:

(a) Section 48(5) is in connection with rate of tax or amount of sale price, but not about non-payment of tax by vendor.

(b) If interpreted in the manner done by the Department, it will be a burden impossible of performance.

(d) The collection of VAT by vendor is as agent of the Government and hence payment to him amounts to payment to the Government.

(e) It will create discrimination and two purchasing dealer will not be getting equal protection under the law. For example, if two buyers have purchased from the same seller and the said seller pays tax in relation to one buyer only, then such buyer will get set-off whereas the other will not get the same, since no tax is paid on his sale. Thus, though both the buyers are similarly situated from purchaser’s point of view, still there is no equal protection. This is ultra vires Article 14.

(f) There is no system/mechanism for finding out actual tax paid by vendors, which is also to be paid in future and not at the time of sale. Therefore, there will always be a hanging sword on the buyer and this will be unreasonable condition, that is why the provision is ultra vires Article 19(1)(g).

(g) VAT is an indirect tax and it is to be passed on to the consumer. If the set-off is disallowed after goods are already sold, then there will not be an opportunity to recover the same from the buyer/consumer. Thus, this will bring unexpected burden and will also be against the principles of VAT, that there should not be a cascading effect.

(h) A number of judgments were also relied upon to show importance of registration certificate as well as effect of declaration.

On the other hand the Department’s contentions were as under:

(a) The set-off is concession and the Government can put conditions as may be deemed fit.

(b) Set-off contemplates something to be given from the amount already received.

(c) Though the vendor collects tax, it is as a part of the sale price and is not under obligation to collect the same as tax.

(d) There are number of transactions where taxes are not collected like hawala and allowing set-off will be unjustified.

(e) The judgments cited were distinguished on the ground that there was no provision like section 48(5) in those cases.

The High Court, after hearing both the sides, felt that there is no doubt hardship to buyers, but at the same time it is not in favour of striking down the constitutional validity. However, the High Court suggested for bringing some balance between the two sides. At this juncture the Department gave stepwise action in relation to vendors. The said stepwise action is reproduced in para 51 of the judgment which is reproduced below for ready reference. “51. The Learned Advocate General appearing on behalf of the State has tendered a statement of the steps that would be pursued against defaulting selling dealers:

(1) The Sales Tax Department will identify the defaulters, namely, registered selling dealers who have not paid the full amount of tax due in the Government Treasury either by not filling their returns at all or by filing returns but not paying the full tax due (i.e., ‘short filing’) or where returns are filed but sales to the concerned dealers are not shown (i.e. ‘undisclosed sales’).

(2) Set-off will be denied to dealers where at any stage in the chain of sales a tax invoice/ certificate by a defaulter is or has been relied on:
(a) In the event of no returns having been filed by the defaulter, the dealers will be denied the corresponding set-off;

(b) In the case of short filing, dealers who have purchased from the defaulter will be granted set-off pro rata to the tax paid;

(c) In the case of undisclosed sales, the dealers will be denied the entire amount being claimed as set-off in relation to the undisclosed sale;

(d) To prevent a cascading effect, the tax will be recovered only once. As far as possible, the Sales Tax Department will recover the tax from the dealer who purchases from the defaulter.

However, the Sales Tax Department will retain the option of denying a set-off and of pursuing all selling dealers in the chain until recovery is ultimately made from any one of them.

(3) The full machinery of the Act will be invoked by the Sales Tax Department wherever possible against defaulters with a view to recover the amount of tax due from them, notwithstanding the above. Once there is final recovery (after exhaustion of all legal proceedings) from the defaulter, in whole or part, a refund will be given (after the end of that financial year) to the dealer(s) claiming set-off to the extent of the recovery. This refund will be made pro rata if there is more than one dealer who was denied set-off;

(4) Refund will be given by the Sales Tax Department even without any refund application having been filed by the dealers, since the Sales Tax Department will reconcile the payments, inform the dealer of the recovery from the defaulter concerned and grant the refund;

(5) Details of defaulters will be uploaded on the website of the Sales Tax Department and dealers denied set-off will also be given the names of the concerned defaulter(s);

(6) The above does not apply to transactions by dealers where the certificate/invoice issued is not genuine (including hawala transactions). In such cases, no set-off will be granted to the dealer claiming to be a purchaser;

(7) The above should not prevent dealers from adopting such remedies as are available to them in law against the defaulters.”

The High Court has upheld enactment of section 48(5). The Bombay High Court distinguished the judgment of the Punjab and Haryana High Court in the case of Gheru Lal Bal Chand (45 VST 195) (P&H) on the ground that in that case provision like section 48(5) was not available, though petitioner had tried to explain that the provisions in that case were almost similar as under the MVAT Act, 2002. The High Court, while upholding the validity of section 48(5) has expected the Department to follow action plan scrupulously.

From the action plan given by the Department it transpires that the following course of action will be followed by the Department.

(a) The Department will identify the vendors who are defaulters like non-filer of returns, short filer of returns and non-disclosure of sales. This requires assessment of the defaulting vendor. Therefore, unless such assessment of vendor is carried out, no demand can be made on the buyer. The letters issued, as on today, are issued based on mismatch on the computer. However, in light of the above action plan this cannot be the correct position. The buyer can be approached only after assessment of the vendor.

(b) The Department has also to bifurcate Input Tax Credit based on pro rata theory. This also requires assessment of the defaulting vendor.

(c) Refunds to be given subject to the recovery from the vendors. Therefore, the Department has to assess buyers also and keep the record including pro rata allowance of set-off, so as to tally with subsequent refund.

(d) If there is allegation of hawala no set-off will be allowed. However as noted above in the case of Premium Paper and Board Industries Ltd. v. The Joint Commissioner of Sales Tax, Investigation-A & Ors. (W.P. No. 347 of 2012, dated 30-4-2012), for deciding hawala transactions assessment of the buyer will be necessary.

Conclusion

The judgment as on today may bring unexpected liability on purchasers without having any mechanism to protect themselves from defaulting vendors.

We hope that the innocent buyers will get justice from higher forum in due course of time.

We can also understand the anxiety of the Department to collect legitimate revenue of the State. However, it is also necessary to note that the individual buyer cannot bear unexpected burden because of fault on part of the third person i.e., vendor. Therefore, it is necessary to apply the law, keeping best interest of both the sides and it is better that the action plan as given in the judgment is followed in true spirit. The Government can also think of bringing other suitable modalities for giving protection to the innocent buyers, while safe guarding interest of the Revenue.

shailesh.kwebmaker

Deduction for “Depreciation” in Works Contract A Dilemma

Introduction

Under Maharashtra Value Added Tax Act, 2002 (MVAT Act, 2002), transactions of works contract are liable to tax. Works Contract is composite contract consisting of supply of materials and labour. In Builders Association of India vs. Union of India (73 STC 370)(SC), Hon. Supreme Court has held that Sales Tax can be levied only on value of goods and not on the total value. In case of Gannon Dunkerly & Co. (88 STC 204)(SC) Hon. Supreme Court further highlighted mode of arriving at value of goods in a works contract.

The State VAT Acts normally provide statutory method for arriving at taxable value of goods in light of the above judgment. This can be referred to as statutory method. Under MVAT, Rule 58(1) of MVAT Rules, 2005 prescribes the method for arriving at value of goods. The relevant portion is reproduced for ready reference.

“58. (1) The value of the goods at the time of the transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract may be determined by effecting the following deductions from the value of the entire contract, in so far as the amounts relating to the deduction pertain to the said works contract:–

(a) labour and service charges for the execution of the works;

(b) amounts paid by way of price for sub contract, if any, to sub-contractors;

(d) charges for obtaining on hire or otherwise, machinery and tools for the execution of the works contract;

(e) cost of consumables such as water, electricity, fuel used in the execution of works contract, the property in which is not transferred in the course of execution of the works contract;

(f) cost of establishment of the contractor to the extent to which it is relatable to supply of the said labour and services;

(g) other similar expenses relatable to the said supply of labour and services, where the labour and services are subsequent to the said transfer of property;

(h) profit earned by the contractor to the extent it is relatable to the supply of said labour and services: …” (emphasis given)

Deduction for Depreciation

One of the deductions is for charges for obtaining on hire, the machinery and tools used in the execution of works contract (item (d) above in Rule 58(1)).

If machinery is obtained on hire, there is no doubt that deduction will be available for hire charges paid. However, it is also possible that contractor will have its own machinery and will be using it for execution of contract. An issue can arise, as to whether or not depreciation relating to such machinery is eligible for deduction under above category? The issue can be examined vis-a-vis into from the following judgments.

Larsen & Toubro Ltd. v. State of Karnataka (34 VST 53)(Kar)

In this case Hon. High Court, in relation to the allowability of depreciation has observed as under:

“It is in the background of these further developments, we are examining the merits of the submissions made by Sri T. Suryanarayana, learned counsel for the appellant-assessee. On such an examination, while we find and as submitted by the learned Additional Government Advocate the word “depreciation” is conspicuously absent either in rule 6 particularly, Explanation 1 to sub-rule (4) of rule 6 or even in the judgment of the Supreme Court in Gannon Dunkerley’s case [1993] 88 STC 204 as it occurs on this aspect at pages 233 and 235, we are nevertheless inclined to examine the submissions made by Shri Suryanarayana, learned counsel for the appellant-assessee, for the reason that the entire exercise for the purpose of levy of tax under section 5B of the Act is only to ascertain the precise value of the goods in respect of which title passes from the contractor to the client on the execution of the work. The charge cannot be on anything over and above the value of the goods, not even by a pie ! Even assuming that rule 6 when read in its entirety does not contain the word “depreciation”, but nevertheless should necessarily take the hue from the permitted deductions as indicated by the Supreme Court in clause (d) occurring at page 235 of the judgment which reads as “charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works of the Rules construed in this background and answer the question. We say so, for the reason that it is the goods of the assessee for the purpose of execution of the works contract, which the assessee otherwise, could have hired the machinery and tools, instead of utilizing its own machinery and tools and in the process of execution of the work, the machinery and tools are worn down and depreciate in value and as the end price, i.e., the value of the contract is fixed or determined by the contractor factoring this wear and tear to the machinery and tools as a consequence of using them for the execution of the works contract, the value of the proportionate wear and tear of the machinery which is otherwise identified as depreciation has to be necessarily permitted as a deduction on the premise that it is equivalent to the hire charges as is otherwise provided in clause (d) and for such purpose one has to understand the same even in terms of the language of Explanation I as quoted above and particularly, to be one within the scope of “other similar expenses relatable to supply of labour and services”.

We find the submission of Shri Suryanarayana, learned counsel for the appellant attractive enough for acceptance, for the reason that section 5B of the Act is only as a sequel to sub-clause (b) of clause (29A) of article 366 which reads as “a tax on the transfer of the property in goods (whether as goods or in some other form) involved in the execution of a works contract:”.

The Hon. Karnataka High Court held that depreciation amount is deductible expenditure before arriving at value of goods.

State of Kerala v. Thampi & Company (41 VST 107)(Ker)

In this case Kerala High Court was also dealing with similar controversy. Hon. Kerala High Court held that the claim is non-admissible, observing as under:

“Depreciation has a definite meaning and content and its rates are varying both for the purpose of income-tax and for preparing profit and loss account and balance sheet under the Companies Act. Therefore, if the Legislature ever intended to provide for deduction of depreciation in the computation of taxable turnover on works contract, we are sure that it would have been specifically provided in section 5C along with other deductions specifically provided. If the Tribunal’s reasoning that depreciation is also covered by sub-clause (2) of section 5C(1) under the head “charges otherwise incurred on machinery and tools for the execution of works contract”, then the provision becomes vague inasmuch as what is the rate of depreciation to be granted and whether it should be straight line method or written down value method, should have been mentioned in the section itself. In the absence of any specific provision in section 5C, we feel depreciation on machinery or tools is not eligible for any deduction in the computation of taxable turnover on works contract. Besides this, in our view, “charges for obtaining on hire or otherwise” in sub-clause (c)(ii) can only mean charges paid for obtaining machinery or tools under any other arrangement other than hire. In other words, if the charges are paid on any other terms, i.e., other than on hire arrangement for availing of the facility of machinery and tools, then only such charges are eligible for deduction, which certainly does not include depreciation because notional expenditure in the form of amortisation of cost of machinery and tools owned by the contractor is not visualised in section 5C(1)(c)(ii) of the Act.”

Thus, the situation has become debatable. In this judgment of Kerala High Court, the earlier judgment of Karnataka High court in Larsen & Toubro Ltd. (cited supra) was not cited, and not considered. Had it been the case, it may have made a difference.

Conclusion
When Hon. Supreme Court intended to allow hire charges towards machinery, on same parity, depreciation needs to be allowed. Depreciation is nothing but writing off of sum spent earlier, in part, over a certain number of years. Therefore, with due respect, it can be said that the judgment of Kerala High Court requires reconsideration. It is expected that the issue will be resolved at the earliest.

shailesh.kwebmaker

HIGHLIGHTS OF THE MAHARASHTRA STATE BUDGET 2011-12

26% increase in Sales Tax (VAT) collection in 2010-11 over 2009-10. Original target of Rs.35896 crore now increased to Rs.40415 crore. Estimated revenue for 2011-12 is set at Rs.46000 crore.

31% increase in Stamp Duty collection in 2010- 11 over 2009-10. Original Budget estimates of Rs.10478 crore now increased to Rs.14140 crore. Revenue for 2011-12 is estimated at Rs.15677 crore.

Revenue from State Excise Duty is estimated at Rs.5800 crore for 2010-11 and Rs.8500 crore for 2011-12.

Revised estimates of revenue from Motor Vehicle Tax for 2010-11 are at Rs.3471 crore, almost 21.36% higher than the original Budget estimates of Rs.2,860 crore. The Budget estimates for 2011-12 are pegged at Rs.4,000 crore.

Devolution from Central Government also increased substantially. As per the recommendations of the 13th Finance Commission, Maharashtra’s share in sharable taxes (other than service tax) has been increased from 4.997 % to 5.199%. The share in service tax has been increased from 5.063% to 5.281%. The total transfers for the year 2011-12 including devolution and grants is Rs.16593.9 crore.

Total tax receipts, including devolution, are estimated at Rs.84914 crore in revised estimates for 2010-11, about 13.64% higher than the original Budget estimates of Rs.74721 crore. The Budget estimates for 2011-12 are at Rs.97404 crore.

Rate of tax on ‘declared goods’ proposed to be increased from 4% to 5%.

No change in standard rate of VAT, continue to remain @ 12.5%.

Extension of time limit to exemption of essential commodities such as rice, pulses and their flours, turmeric, chillies, tamarind, gur, coconut, cumin seeds, fenugreek and parsley (Suva), papad, wet dates, Solapuri chaddars and towels, etc., up to 31st March 2012.

Fabrics and sugar continue to remain tax free.

Domestic LPG shall also continue to be tax free.

Concessional rate of tax on tea, i.e., 5%, proposed to be continued till 31st march 2012.

Tax on aviation turbine fuel, sold from places in Maharashtra other than Mumbai and Pune districts, is charged at the concessional rate of 4% up to 31-3-2011. This concession is now extended up to 31-3-2012.

Pre-fabricated domestic biogas units are proposed to be tax free.

No tax shall be levied on transfer of copyrights of films relating to their exhibition in theatres.

Telecasting rights of various entertainment and sports events are proposed to be included in the list of ‘intangible goods’, attracting tax @ 5%.

Rate of tax on dry fruits proposed to be reduced from 12.5% to 5%.

Rate of tax on carbonated soft drinks to be increased from 12.5% to 20%.

Sale of goods to electricity generating, transmission, distribution units, telecom, industry, defence and railways, etc., which was attracting concessional rate of tax @ 4% is now proposed to increased to 5%.

Rate of tax on goggles proposed to be increased to 12.5%.

Turnover limit of Composition Scheme for Bakers to be increased from Rs.30 lakh to Rs.50 lakh.

E-services to the dealers to be strengthened by using TINXSYS network. Business intelligence tools and data warehouse are also proposed to be adopted for quicker analysis of data.

Some amendments, in the MVAT Act and Rules are proposed, including amendments regarding certain procedures in respect of filing of returns, grant of refunds, voluntary registration and penalties, etc.

Stern actions are proposed to be taken against Hawala dealers.

The present procedure for payment of sugarcane purchase tax is proposed to be changed by amending the Sugarcane Purchase Tax Act.

Amnesty Scheme for sick sugar factories.

Proposal to waive interest and penalty to soap industry certified by Khadi & Village Industry Board.

Proposal to change the scheme of levying tax on sale of liquor. First-point tax proposed in the hands of manufacturers/importers. Once tax is paid by the manufacturer or importer, subsequent dealers will not be required to pay any tax. However, the rate of tax on liquor served in hotels having 4-star or higher rating shall be 20%, while in other bars, restaurants and clubs is proposed to be @ 5% (without set-off benefits).

Rate of excise duty on manufacture of country liquor an IMFL is proposed to be increased.

Uniform rate of Stamp Duty to be charged @ 0.005% on transactions taking place at stock and commodity exchanges, including transactions of securities, futures, delivery-based, non-delivery-based whether for clients or on own account.

Transactions of transfer of long-held tenancy rights of house properties to attract Stamp Duty.

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shailesh.kwebmaker

Sales / Exchange / Works Contract

Introduction

Various types of transactions take place in day to day commercial world. A peculiar issue which is being considered here is about the status of a transaction where the dealer received goods for repair from his customer. The dealer replaces the same with his own goods and receives charges for repair. The old one, received from customer, is retained with him for further replacement after repair. The issue is whether on receipt of money from customer towards repair, whether the dealer would be liable to tax under Sales Tax Laws or it can be considered as transaction of exchange of goods thereby not liable to sales tax, or whether it falls in the category of works contract?

Judgment of Hon. M.S.T. Tribunal

The above issue was dealt with by Maharashtra Sales Tax Tribunal in the case of Kirloskar Copeland Ltd. (S. A. No. 428 of 2009 dt.18.04.2011).

In this matter, the appellant, M/s. Kirloskar Copeland Ltd., is a manufacturer & seller of compressors used in air-conditioners. It accepted defective compressors beyond the warranty period with certain fixed repair charges from customer & replaced them at the option of customer with another repaired compressor off the shelf. The defective compressor was then sent for repairs. The said repaired compressor was then available for replacement in lieu of defective compressor of another customer. The cycle goes on. The repairs charges received were mentioned in books as ‘repair charges’. This was treated by assessing officer as ‘sale’ of old repaired compressors and levied tax on the same.

Before Tribunal, reliance was placed on following judgments. G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT

(1) Gannon Dunkerley & Co. (9 STC 353) (SC)

(2) Devi Dass Gopal Krishnan (20 STC 430) (SC)

(3) Hotel Sri Lakshmi Bhavan (33 STC 444)

(4) Vishnu Agencies (P) Ltd. (42 STC 31) (SC) & others.

Tribunal held that in a transaction of cross transfer of property in defective compressor received from customer and giving repaired compressor off the shelf, there is no consensual agreement of sale supported by price or money consideration. Holding this as not a ‘sale’ transaction, Tribunal set aside the tax.

Therefore, the situation that developed is that, such receipt of money is not liable to tax under Sales Tax Laws.

Madras High Court’s Judgment

Recently, Madras High Court had an occasion to deal with a similar issue. Reference is to the judgment of Madras High Court in Sriram Refrigeration Industries Ltd. Vs. State of Tamil Nadu (53 VST 382)(Mad).

In this case also, the dealer received defective compressors, in its Tamil Nadu office, gave another repaired compressor and also charged repair charges. The defective compressor was then transferred to Hyderabad workshop to repair and keep it in rolling stock.

The Tamil Nadu Sales Tax authorities levied Sales Tax on the same considering the transaction as works contract.

Based on above facts, the arguments on behalf of assessee, can be noted as under:

“The learned counsel appearing for the petition/ assessee contended that the Tribunal was wrong in holding that it is a deemed sale. He further contended that the Tribunal is wrong in holding that the transfer of property by way of replacement of defective parts in the compressors while undertaking repair works took place within the State of Tamil Nadu and hence, the transactions are liable to tax. He further submitted that the authorities have failed to appreciate the fact that the petitioner/assessee received defective compressors from their dealers, who had earlier received the same from their respective customers to whom the said compressors were sold by them and later, these defective compressors were despatched to the factory at Hyderabad for repair and reconditioning; that the repaired compressors were taken into the petitioner’s/assessee’s floating stock in due course on receipt from Hyderabad. But soon after the receipt of defective compressors, the reconditioned compressor was given to the authorized dealer from their floating stock and flat rate was charged as repairing charges, therefore, the assessing officer ought to have appreciated that the transactions partake the character of an exchange not exigible to tax under the provisions of the Tamil Nadu General Sales Tax Act.”

In addition, it was also argued that the transaction is not works contract as use of spares etc. is negligible and not amounting to works contract. In alternative, it was argued that it is a transaction from Andhra Pradesh and not in Tamil Nadu. Hon. High Court rejected contention and upheld the levy considering it as works contract. In its judgment, Hon. High court observed as under:

“The petitioner/assessee is the manufacturer of compressors and the said compressor is an important component in the air-conditioner/ refrigerator. The petitioner/assessee supplied refrigerators to the customers. There is no factory with repairing facility within the State of Tamil Nadu. The defective compressors were brought to the petitioner for repairs. When the defective compressor is handed over, a rectified compressor is immediately supplied by the petitioner. The petitioner, in order to have quick servicing, replaced the defective compressor by a re-conditioned compressor of the same model. The defective compressor received was subsequently transferred to the factory in Andhra Pradesh for rectification of the defects. The appellant/dealer collected repair charges for the defective compressors. The whole transaction is completed within the State. Therefore, the authorities below have taken a view that the transaction is works contract and the transfer of property in goods involved in the execution of works contract and thereby imposed sales tax on such transfers. The authorities have also held that there is no separate particulars towards labour charges and value of the property transferred. The provision of section 3B of the Act was attracted and the lower authorities correctly allowed 30 per cent deduction towards labour charges and the remaining 70 per cent was taxable at the appropriate rate. From the transaction, it is clear that the supply of defective compressor has been returned as a rectified compressor and therefore, the authorities below held that it amounted to works contract.
After the 46th Amendment, the definition of “sale” was enlarged including the transfer of property of goods involved in the execution of the works contract and thereby, imposed sales tax on such transfer and therefore, the tax on transfer of property in goods “whether as goods or in some other form” involved in the execution of works contract falls within the ambit of article 366(2A) of the Constitution of India. In this case, the defective compressor is repaired and regarding the same, the assessee also produced certain invoice wherein it is categorically stated that the repair charges were charged.”

It is further observed as under:
“26. While looking deep into the nature of transaction, it is found that the customer is never aware of the repair work being carried out in other State. The customer is not placing orders with the factory at Hyderabad for repair and return of the repaired compressor from Hyderabad to him. On the other hand, the transaction is made across the counter of the appellant by the customer, by delivering the defective compressor and receiving the repaired compressor. The point to be noted is that the parts to be replaced in the defective compressor and labour charges are arrived at and collected and even before the same compressor could be got repaired and given a replacement by a repaired compressor is made from the godown-stock. The parts to be replaced and the ‘work to be carried out’ are clearly identified as soon as the defective compressor is handed over to the appellant by the customer and charges there for are collected and the transaction is completed within the State. Thus the standard parts with particular reference to the ‘type and make’ of the compressor are determined, and thus they are only standard goods or ascertained goods. In the case of ascertained goods in a transaction of ‘sale’, the transfer of property takes place when the contract of sale or purchase is made. Accordingly, to settled position of law, the principles that apply to ‘sale’ will apply to ‘deemed sale’ as well.”

“From a reading of the above finding, it is clear that the whole transaction forms part of an implied contract for repair of the defective compressor in the State. It is only a replacement with a reconditioned compressor of the same mode instead of a defective compressor. Therefore, the authorities below are correct in coming to the conclusion that there is no contract for sale of compressors. Therefore, the transaction has to be treated only as works contract. The reconditioned compressors are handed over and the defective compressors were received by the assessee after charging repair charges and the whole transaction is within the State. After considering the nature of the transaction, all the authorities have given a categorical finding that there is a works contract and the transfer of property acquired within the State in the said contract. Further, the authorities below are correct in holding that in the absence of separate particulars towards labour charges and the value of property transferred the provisions of section 3B of the Act were attracted and allowed 30 per cent deduction towards labour charges and only the remaining turnover was chargeable to tax at the appropriate rate. The concurrent findings given by the authorities below are based on valid materials and there is no error or illegality in the order of the Tribunal warranting interference.”

Conclusion

It appears that such replacement in repair transaction will be works contract transaction. However, it is a debatable issue. It is possible to argue that replacement by a repaired compressor is normal ‘sale’ itself as there is transfer of a pre-existing repaired compressor from the assessee to the customer at a specific charge. The receipt of the defective compressor only helps the customer to bring down the take away price for the repaired compressor. In any case, in this judgment, based on finding of lower authority that the transaction is a works contract, the High court has upheld the levy as a works contract.

In the light of the above judgment, the judgment of Tribunal cited above will be correct to the extent that it is not ‘sale’ simpliciter. However, the position that it will not be covered under the Sales Tax Laws at all, cannot be a correct position. Though not as normal sale, but by way of a works contract, it will be taxable under the Sales Tax Laws.

shailesh.kwebmaker

Periodicity for ‘I’ form under CST Act, 1956

Under the CST Act there are various declaration forms. The forms are required to be furnished as per given periodicity. As per Rule 12(1) and Rule 12(9)(b) of the CST (Registration & Turnover) Rules, 1957, the C/E1/EII forms can be on quarterly basis. In other words, the forms can be for individual transaction or can be for all transactions in one quarter. As per Rule 12(5) of the CST (R & T) Rules, 1957, ‘F’ Forms can be on monthly basis. However, there is some ambiguity about periodicity of ‘I’ forms.

Few aspects of periodicity of ‘I’ forms are discussed below:

This form is issued by Special Economic Zone Unit to its supplier when the transaction is inter-State purchase from such supplier. The sales against ‘I’ forms are fully exempt from levy of CST in the hands of suppliers. ‘I’ form is issued as per section 8(8) of the CST Act, 1956. The said section reads as under:

“(8) The provisions of Ss. (6) and (7) shall not apply to any sale of goods made in the course of inter-State trade or commerce unless the dealer selling such goods furnishes to the authority referred to in Ss. (6), a declaration in the prescribed manner on the prescribed form obtained from the authority referred to in Ss. (5), duly filled in and signed by the registered dealer to whom such goods are sold.

Explanation — For the purpose of Ss. (6), the expression ‘special economic zone’ has the meaning assigned to it in clause (iii) to Explanation 2 to the proviso to section 3 of the Central Excise Act, 1944.”

In light of the above provision, the Central Government has prescribed Rule 12(11) in the CST (Registration & Turnover) Rules, 1957. The said Rule is reproduced below for ready reference:

“12(11)The dealer, selling goods in the course of inter-State trade or commerce to a registered dealer under sub-section (6) or under sub-section (8) of section 8 or under subsection (1) of section 5 of the Central Sales Tax Act, 1956 read with section 76A of the Customs Act, 1962 (52 of 1962), shall furnish a declaration for the purposes of Ss. (8) of the said section 8 in Form I duly countersigned and certified by the Authority specified by the Central Government authorising the establishment of the unit in the Special Economic Zone (notified u/s. 76A of the Customs Act, 1962 (52 of 1962) that the sale of goods is for the purpose of establishing a unit in such Zone.”

The relevant part of form ‘I’ is reproduced below for ready reference:

It can be seen that the ‘I’ form can be for sales made against one purchase order of the customer. There is no provision for clubbing more than one purchase order in one ‘I’ form. This position can be compared with Rule 12(1) about issue of ‘C’ forms. The said Rule is reproduced below for ready reference.

“12. (1) The declaration and the certificate referred to in Ss. (4) of section 8 shall be in Forms C and D, respectively; [Provided that Form C in force before the commencement of the Central Sales Tax Registration and Turnover (Amendment) Rules, 1974, or before the commencement of the Central Sales Tax Registration and Turnover (Amendment) Rules, 1976, may also be used up to the 31st December, 5 [1980], with suitable modifications:]

Provided further that a single declaration may cover all transactions of sale, which take place in a quarter of a financial year between the same two dealers.”

It can be seen that under this rule, the sale transactions effected in one quarter can be included in one ‘C’ form. This suggests that although the ‘C’ forms are supposed to be against each sale, however, by giving specific provision, it is provided that the sales transactions in a quarter can be included in one ‘C’ form.

In Rule 12(11) of CST (R & T) Rules, 1957, about ‘I’ form, there is no such provision allowing clubbing of transactions of one quarter in one ‘I’ form. In absence of the same, the natural outcome will be that against each sale, one ‘I’ form will be required. This position also gets confirmed by prescription in body of ‘I’ form. The form itself specifies that all the sale bills against one purchase order can be included in one ‘I’ form. It is a fact that one purchase order is one transaction. There can be more than one delivery in relation to such purchase order and accordingly more than one sale bill also may be prepared. However, it will be considered to be one transaction and therefore the form includes all the sale bills against one purchase order to be included in one ‘I’ form.

Howsoever, there is no facility to include more than one purchase order in one ‘I’ form, though they may be within one quarter. Therefore, the position is for one purchase order one ‘I’ form is required.

It is also a fact that if the declaration forms are not as per the provisions of the Rules, they are considered to be invalid. There are number of judgments wherein it is held that the procedure regarding issue of declaration forms should be strictly followed, lest the forms will be invalid and the claim may not be allowed. Reference can be made to judgment in case of India Agencies (Regd.) v. Additional Commissioner of Commercial Taxes, Bangalore, (139 STC 329) (SC). Supreme Court has observed as under:

“(1) The dealer has to strictly follow the procedure and produce the relevant materials required under that Rule. Without producing the specified documents as prescribed thereunder a dealer cannot claim the benefits provided u/s. 8 of the Central Sales Tax Act, 1956.

(2) Section 8(4)(a) of the Central Sales Tax Act, 1956, specifically provides that the provisions of Ss. (1) shall not apply to any sale in the course of inter-state trade or commerce unless the dealer selling the goods furnishes to the prescribed authority in the prescribed manner a declaration duly filled and signed by the registered dealer to whom the goods are sold containing the prescribed particulars in a prescribed form obtained from the prescribed authority.”

Therefore, the legal position appears to be clear that unless the form is as per relevant Rule it will not be valid and will not be allowable. Thus, in respect of ‘I’ forms special care is required to be taken that they are per transaction and not on quarterly basis.

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Deduction from Set-off in Respect of Fuel Purchases – When Applicable

Introduction
Under Maharashtra Value Added Tax Act, 2002 (MVAT Act, 2002) the set off scheme is prescribed under the authority of section 48, read with rules. Rules 52 to 55 of MVAT Rules are relevant for deciding the set off quantum. Rule 52 provides that the purchases of capital assets, trading goods, as well as purchases debited to P & L A/c are eligible for set off. The set off availability is subject to retention as per rule 53 or prohibition as per rule 54.

Rule 53
Rule 53 provides for retention from set off, when the goods are used in the prescribed circumstances. In this note, the issue about reduction from set off in respect of purchases which are used as fuel is discussed. The reduction from set off in relation to fuel purchase is provided in Rule 53(1). 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 disallowed in part or full in the event of any contingencies specified below and to the extent specified.

(1) If the claimant dealer has used any taxable goods as fuel, then an amount equal to three per cent of the corresponding purchase price shall be reduced from the amount of set-off otherwise available in respect of the said purchase.”

What is fuel?
The reduction is to be made when the item purchased is used as fuel. The term ‘fuel’ is not defined in the MVAT Act/Rules.

In common parlance, fuel means any item which is burnt for producing heat. The dictionary meaning also suggests the same thing. The fuel is defined as under in Webster’s Encyclopedic Unabridged Dictionary of the English Language:

“fuel: 1. combustible matter used to maintain fire, as coal, wood, oil etc. 2. that which gives nourishment or incentive: our discussion provided him with fuel for the debate – v.t.3. to supply with fuel- v.i.4. to obtain or replenish fuel. [ME fule(le), feuel < OF feuaile < LL focalia, neut.pl.of focalis of the hearth, fuel. See focus, – AL]..”

“com.bus.ti.ble 1.capable of catching fire and burning; inflammable; flammable: Gasoline vapor is highly combustible. 2. Easily excited: a high-strung, combustible nature -n.3.a combustible substance: Trucks carrying combustibles will not be allowed to use this tunnel….”

From the above combined meanings of fuel and combustible, it is clear that the item, which burns, to produce heat can be considered as fuel. From the examples given, the position is more clear like, oil, wood etc., which burn, are considered as fuel.

Factual position
On this background, the issue which arises is the use of combustible item. If the item is burnt for producing heat, then it can fall in the category of fuel. There may be circumstances, where the combustible item is used and may also be giving heat. However, simply because some heat is generated, it cannot become fuel and it can be raw material. In other words, whether the item is used as a fuel or a raw material is a matter of factual findings. Some guidelines can be had from the decided judgments.

Recent judgment in case of Gupta Metallics & Power Ltd. (54 VST 292)(Bom).

The dealer was manufacturer of sponge iron. The process of manufacturing of sponge iron involved use of raw material i.e. iron ore, coal and dolomite. The dealer had for the assessment year 1.4.2005 to 31.3.2006 and assessment year 1.4.2006 to 31.3.2007 claimed set-off of 100% in respect of the tax paid on the coal purchased and used in the manufacturing of sponge iron. The dealer before the assessing officer claimed that the said coal was used as raw material for manufacturing sponge iron from iron ore and that is how the respondent claimed 100% set off as per Rule 53 of MVAT Rules, 2005. While passing the assessment order for the aforesaid periods, the assessing authority came to the conclusion that the part of coal used in the manufacture of sponge iron was used as a fuel and part as raw material. The assessing officer permitted the respondent to claim set off to the extent of 50% by treating that 50% of the coal was used as a raw material and 50% of the coal was used a fuel. The reasoning of the assessing authority was that the coal, while reacting with iron in the kiln also generates heat, which is used for the said manufacturing process. Therefore, on the 50% part set off was allowed after reduction of 3% as per above rule 53(1). In the second appeal, Tribunal concurred with the dealer and held that in the given circumstances, coal was used as a raw material. Though, heat is generated and may be useful in the manufacturing process, the coal was not put up in the kiln for the said purpose but basically to act as reductant i.e. raw material. The department filed appeal before Bombay High Court. Hon’ble High Court, after discussing the facts, observed as under;

“It would be proper to deal with the arguments on both the sides on the question whether the coal used in the process by the respondent was used as a raw material or as fuel. In our view, it would be proper to reproduce the report which is contained in letter dated 29.2.2008 to which a reference has been made by all the authorities below. The text of the report is as follows:

“Report:
In the Rotary Kiln Process of manufacturing Sponge Iron, a premixed charge of Iron Ore, Non-Coking Coal and Flux is added inside the Kiln. This charge forms a bed inside the Kiln and slowly moves towards the discharge end. During the transit of the charge, the Iron Ore is slowly converted into Sponge Iron, by the process of reduction. Inside the bed, the carbon of the Non-Coking Coal reduces the Iron Oxide slowly to Iron and the carbon gets converted to Carbon-mono-Oxide gas. Thus, inside the bed the coal plays the role of a reductant. The gas Carbon-mono-oxide rises out of the bed and is now post-combusted to gas carbon-dioxide by carefully admitting air inside the Kiln. This reaction taking place in the area above the bed is a highly exothermic reaction and produces the bulk of the heat required for the process. Thus, the Non-Coking Coal provides the gas Carbon mono-Oxide for satisfying the heat requirements of the process i.e. it indirectly plays the role of a fuel in the Rotary Kiln Process.

It is impossible to quantify the ratio of coal as a reductant vs. fuel in the Rotary Kiln.

10. We have perused the report and we have also considered the submissions advanced by both the sides. A reading of the report clearly indicates that to convert iron ore into sponge iron, the noncoking coal is used. It must be mentioned that the orders passed by the authorities did not use the specific word “Noncoking coal”. The report clearly indicates that the mixture of iron ore and non-coking coal when heated from outside, would ultimately get converted into sponge iron. It is also noticed that on account of the chemical qualities of the non-coking coal, heat is generated. The carbon of non-coking coal reduces the iron oxide slowly to sponge iron and carbon monoxide gas is generated. The report specifically mentions that inside the bed, the Non-Cooking Coal plays the role of a reductant. It further indicates as to how highly exothermic reaction takes place and produces the bulk of the heat required for the process. It also shows that non-coking coal provides the gas carbon mono-oxide for satisfying the heat requirements of the process. On account of this, the author of the report has observed “It indirectly plays a role of fuel in the rotary kiln process”. It is seen that chemical qualities of Noncooking coal to generate heat are used. Merely because heat is generated in the process it cannot be a ground to hold that Noncooking coal so used was used as fuel.

The above observations clearly show that the coal used in the process of manufacturing of sponge iron is used as a raw material and not as a fuel. It is clear that the Assessing Officer as well as the Appellate Authority misread the text of the report dated 29.12.2008. We hold that the tribunal has rightly held that the coal used by the respondent was a raw material and not used as a fuel.”

Thus, simply because heat gets generated, as well as may be useful in the manufacturing process, an item does not become fuel automatically. If the prime object of using the item is as raw material, where without such use, manufacturing may not be feasible then the item is to be considered as a raw material and not a fuel.

Similar is the judgment of Gujarat Tribunal in case of Welspun Steel Ltd. (First Appeal No. 27 of 2010 dated 27.12.2011), wherein also Gujarat Tribunal has considered the use of coal as a raw material and not a fuel.

Conclusion

Set off is the backbone of VAT system. Further, the responsibility of filing correct return is on the dealer. There is no compulsory assessment for each year. Therefore, if set off is due, but not claimed in the returns, then there is no surety that the dealer will get an opportunity to claim the same. If the assessment is initiated then the claim can be lodged. However, if that is not the case, then dealer will lose it. Therefore, it is dealer, who should take care to claim correct set off. Under the above circumstances, it is necessary that the dealer determines the set off quantum correctly. The above issue is one of the issues, where minute study is required to understand the nature of the use of the item.

If it can be proved that the item is used as a raw material for manufacturing or production, then even though it maybe generating heat, it may not be fuel. Similarly, there may be circumstances, where the item is generating heat but as a prime raw material to produce new goods. Normally, when the item is burnt for giving heat to the other item, it will be in the category of fuel. However, if by burning the item, new goods are produced, then a stand can be taken that it is a raw material and not a fuel. In other words, an item can be used as raw material in the heat form. The particular use is to be decided as per facts of each case and no generalisation can be made. The above judgments may be useful for deciding the issue. If the item is coming in the category of fuel, only then reduction will apply otherwise not and the dealer will get full set off.

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Input Tax Credit vis-à-vis Retrospective Cancellation of Registration Certificate

Introduction
Input Tax Credit (ITC) or Set Off, is the backbone of the VAT system. The selling dealer is entitled to take the credit of the tax paid on his purchases, while calculating the output tax. In other words, he is required to pay differential tax on the value addition. In fact, he determines the sale price of goods based on the understanding that he will get ITC of the taxes paid on his purchases. If this ITC is not allowed, the selling dealer will be required to bear the said burden, which may cause him unexpected financial loss.

It is also a fact that the relevant statute provides for a scheme of Input Tax Credit including a requirement of obtaining supporting documents. Normally, the requirement is ‘tax invoice’ from the vendor with a certificate on the same about doing genuine transaction which is reflected in his books and returns filed under the VAT Act. It is also a fact that no separate machinery about cross verification of the vendor’s position is made available under the Act and invariably the buyer has to depend upon the tax invoice issued by the vendor.

Vendor should be a registered dealer
Generally, one of the conditions for availing ITC is that the purchase should be from a registered vendor. Whether the vendor is registered or not can be seen from the invoice, wherein the particulars about registration like number, date of effect etc., are mentioned. The revenue side is also safe that since the vendor is registered, he will be filing returns and discharging the liability as per the returns. Therefore, registration of the vendor is the most important factor for the grant of set off.

Retrospective cancellation of Registration Certificate
There are provisions for cancellation of registration certificate including with retrospective effect. The buyer may have made purchases when the seller’s certificate was valid but subsequently the sales tax department may cancel the registration with retrospective effect. One view may be that the purchase becomes a purchase from unregistered vendor, thus automatically disentitling the buyer to take set off. However, this will not be the correct position.

Recently, the Hon’ble Madras High Court had an occasion to deal with such a situation. Reference is to the judgment in the case of Jinsasan Distributors vs. The Commercial Tax Officer (CT) Chintadripet Assessment Circle (W.P.No.12305 of 2012 dated 22.11.2012). In this case, the facts were similar. When the buyers made the purchases, the registrations of respective vendors were valid. Subsequently, the registrations were cancelled for various reasons with retrospective effect. Department sought to disallow the set off to the buyers. This action was challenged before Hon’ble Madras High Court. After recording the arguments and relevant provisions, the Hon’ble Madras High Court observed and held as under;

“12. Insofar as the cancellation of the registration certificates of the selling dealers is concerned, it is for those selling dealers to canvas the plea as to when it will take effect either on the date of the order or with retrospective effect. Insofar as the petitioners are concerned, they have purchased the taxable goods from registered dealers who had valid registration certificates; paid the tax payable thereon; availed input tax credit; and the assessing officers have passed orders granting such benefit. Therefore, the assessment orders granting input tax credit were validly passed. There was no cancellation of the registration certificates of the selling dealers at that point of time. The petitioners/assessees have paid input tax based on the invoices issued by registered selling dealers and availed input tax credit. The retrospective cancellation of the registration certificates issued to the sellingdealers cannot affect the right of the petitioners/ assessees, who have paid the tax on the basis of the invoices and thereafter claimed the benefit u/s. 19 of the TNVAT Act, 2006. They have utilised the goods either for own use or for further sale. At the time when the sale was made, the selling dealers had valid registration certificates and the subsequent cancellation cannot nullify the benefit that the petitioners/assessees availed based on valid documents.

13. An almost identical issue was considered by the Supreme Court in State of Maharashtra vs. Suresh Trading Company, (1998) 109 STC 439. In that case, the respondents, who were registered dealers under the Bombay Sales Tax Act, 1959, purchased goods during the period from 01-01-1967 to 31-01-1967 from one Sulekha Enterprises Corporation, who is also a registered dealer under the Bombay Sales Tax Act, 1959. The respondents, before the Supreme Court, resold the goods and claimed certain benefits. That was disallowed by the Sales Tax Officer on the ground that the registration certificate of M/s. Sulekha Enterprises Corporation was cancelled on 20-08-1967, with effect from 01-01-1967. The claim of the respondents, therein the assessees, for deduction of the turnover of sales, as above, was declined and penalty was also imposed. The assessees failed before the appellate authority as well as the Maharashtra Sales Tax Tribunal. The High Court however reversed the decision and upheld the claims of the assessees, holding that disallowing the deductions claimed by the respondents would amount to tax on transactions which were otherwise not taxable. The Supreme Court, while dismissing the appeals filed by the Revenue, held as follows:

‘4. The High Court answered the question in the negative and in favour of the respondents. The High Court noted that the effect of disallowing the deductions claimed by the respondents was, in substance, to tax transactions which were otherwise not taxable. The condition precedent for becoming entitled to make a tax-free resale was the purchase of the goods which were resold from a registered dealer and the obtaining from that registered dealer of a certificate in this behalf. This condition having been fulfilled, the right of the purchasing dealer to make a tax-free sale accrued to him. Thereafter to hold, by reason of something that had happened subsequent to the date of the purchase, namely, the cancellation of the selling dealer’s registration with retrospective effect, that the tax-free resales had become liable to tax, would be tantamount to levying tax on the resales with retrospective effect.

5. In our view, the High Court was right. A purchasing dealer is entitled by law to rely upon the certificate of registration of the selling dealer and to act upon it. Whatever may be the effect of a retrospective cancellation upon the selling dealer, it can have no effect upon any person who has acted upon the strength of a registration certificate when the registration was current. The argument on behalf of the department that it was the duty of persons dealing with registered dealers to find out whether a state of facts exists which would justify the cancellation of registration must be rejected. To accept it would be to nullify the provisions of the statute which entitle persons dealing with registered dealers to act upon the strength of registration certificates.’”

Observing as above, the Hon’ble Madras High Court held that retrospective cancellation cannot affect the claim of ITC of the buyer.

Fall out
The legal position, emerging from above judgment, is that the buyer cannot be affected by retrospective cancellation of registration, even if it is relating to ITC.

Applicability to MVAT Act, 2002
Under MVAT Act, 2002, by way of section 48(2) and rules, it is similarly provided that for claim of ITC ‘tax invoice’ issued by registered dealer is required. The above judgment will squarely apply to MVAT Act also.

However, the further situation under MVAT Act, 2002 is that section 48(5) provides that set off will not be allowed to buyer unless the tax is received in the Government treasury. If vendor has not paid tax, Department can disallow set off. Constitutional Validity of Section 48(5) is upheld by Hon. Bombay High Court in case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur vs. The State of Maharashtra & Ors. (51 VST 1)(Bom).

But, it may be noted that section 48(5) does not provide to disallow set off merely on fact of alleged not payment of tax by the vendor. It is the duty of the Department to assess the vendor and to apply all the recovery measures before disallowing set off to the buyer.

At present, in Maharashtra, set off is disallowed on the ground of cancellation of registration certificate of vendor/s with retrospective effect. Above judgment will be certainly helpful to dealers in Maharashtra. In spite of retrospective cancellation of registration, the dealer (vendor) will be deemed to be registered in view of above judgment. Department may allege that the said vendors whose registrations are cancelled have issued bogus bills and there is a collusion. If that is the charge then the Department is under obligation to prove the same by following principles of natural justice including cross examination opportunity to the buyer.

In a nutshell, retrospective cancellation of registration certificate cannot affect the claim of the buyer.

It also appears that in spite of retrospective cancellation the Department will be under duty to assess them and follow the procedure of recovery before disallowing set off to the buyer, applying section 48(5) of the MVAT Act, 2002. It is expected that the Department will work judiciously to give justice to the purchasing dealers.

Nirav Shah

Retrospective Amendment in MVAT Act – Validity

Introduction

There are a number of cases wherein the issue about validity of retrospective amendment in Fiscal Statues has been dealt with. One such situation arose under the Maharashtra Value Added Tax Act, 2002 (MVAT Act).

The background is that the State of Maharashtra has notified incentive schemes, popularly known as Package Scheme of Incentives (PSI). The schemes were notified from time to time in about 5 years interval.

A similar scheme was announced in the year 1993. Normally, the original unit coming up in the notified backward area is eligible for the benefits of such scheme/s. However, the Government also granted such benefits for expansion of units subject to compliance of certain requirements about minimum capital investment/increase in productions etc.

These units were issued Eligibility Certificate by the Implementing Agency like District Industries Centre and for sales tax purpose the Entitlement Certificate was issued by the Sales Tax Department. Based on such Entitlement Certificate, the eligible units were entitled to enjoy sales tax benefits by way of exemption from payment of tax or were given an option to have deferment facility, whereby they could collect the tax and pay the same to the Government after certain number of years as per the Scheme. The units had the option to choose the method, i.e. either exemption or deferment, for enjoying the benefits.

Pro-rata Method for Expansion
The issue arose where the unit was already holding Entitlement Certificate as an Original Unit (Existing Unit) and it was also granted further Entitlement Certificate for Expansion. The understanding of the Expansion Unit was that they were entitled to avail the benefit of Scheme for all the production of the unit, i.e. production relating to the Existing Unit as well as the Expansion.

However, the approach of the Sales Tax Department was that the Expansion unit can enjoy the benefit to the extent of ratio of Expansion. In other words, it was contemplated by theDepartment that out of the full production, only pro-rata production relating to the Expansion could enjoy PSI benefit. They clarified pro -rata method to work out such turnover by way of a circular. As per the said circular, unit can take benefit in proportion of capital increase to the total capital or production increase to the total production.

The issue was contested by the dealers since 2001 and in case of Pee Vee Textiles (App. No. 48 and others of 2000 dated 17.3.2001) MST Tribunal held that even in case of Expansion, the unit is entitled to enjoy benefit for the full production and the monetary limits should be adjusted accordingly. The issue was further contested before the Hon. Bombay High Court. The Hon. Bombay High Court in the case of Commissioner of Sales Tax vs. Pee Vee Textile (26 VST 281)(Bom) confirmed the decision of the Tribunal. The said judgment of the Hon. Bombay High Court was further confirmed by the Hon. Supreme Court in July 2009.

Retrospective Amendment
On this background, certain amendments were brought in the MVAT Act, in August 2009, by way of an Ordinance. Section 93 of the MVAT Act, 2002 was amended and other amendments were made providing the ratio method for pro-rata working in case of Expansion. Impliedly, the said amendment was effective from 01-04-2005. The period under BST Act was not touched and it remained governed by the above judgments of the High Court and Supreme Court. However, under VAT period effect was given from 01-04-2005.

Since the operation of the amendment was retrospective, it was challenged before the Hon. High Court on the ground of Constitutional Validity. Amongst others, following were the main contentions of the petitioners:

– There was no amendment in the original PSI and the changes are only in the Act which is not permissible.
– The retrospective amendment can be justified only when it is meant for removing the defect shown by the judiciary.
– The retrospective amendment will affect units harshly, since they have already enjoyed the benefits and now have no opportunity to pass on the burden to the buyers and the ultimate customers.
– There was conscious decision by the government from time to time not to implement the pro-rata method. The non-implimentation of section 41BB under BST Act and section 93 in the MVAT Act by not prescribing Rules for pro-rata method was stressed upon. It was shown that even the Rule for pro-rata method proposed in the draft Rules was withdrawn while publishing the Final Rules in 2005.

On behalf of government the submissions were as under:

– That there was intention to provide benefits on pro-rata method.
– There is no vested right to enjoy windfall benefits.
– In Pee Vee Textiles, the Hon. High Court confirmed the judgment of the Tribunal on the ground that inspite of having powers u/s. 41BB to provide pro -rata method, the same is not implemented by prescribing Rules. The legislature has now corrected the said position by the above retrospective amendment. Thus it is for curing the lacuna.

Judgment of the High Court in the case of Jindal Poly Films and Others (W.P.No.313 of 2010 and others dt. 10-10-2013).

After considering the arguments of both the sides, the Hon. High Court referred to a number of judgments about retrospective amendment in the Act. And the Hon. High Court observed that there is ample power for retrospective provision except that it should be reasonable. Like, if the levy is a surprise then it can be considered as invalid.

In particular facts of the above case, Hon. High Court felt that the amendment is not a surprise amendment, but it is to cure the basis of the judgment in the case of Pee Vee Textile. In a nutshell, the Hon. High Court has observed as under:

“32. Essentially, the issue before the Court is as to whether the validating legislation has cured the vice that was noted in the judgment of this Court. Alternately, whether the same judgment could have been rendered despite the amended provisions of the law. The judgment of the Division Bench in Pee Vee Textiles noted that the legislative intent embodied in Section 41BB of the Bombay Sales Tax Act, 1959 could not be effectuated in the absence of rules framed by the State Government prescribing the ratio for the grant of proportionate incentives. This anomaly has been corrected by the state legislature by the enactment of the Maharashtra Act 22 of 2009. The fact that a draft rule which had been formulated at an anterior point in time had not been converted into an operative piece of subordinate legislation cannot possibly override the power of the state legislature to enact legislation which falls within its legislative competence. There can be no estoppel against the legislature. It is legitimately open to the legislature to enact validating legislation with retrospective effect to cure a deficiency which was noted in the judgment of the Court as a result of which the legislative intent of granting incentives pro-rata could not be effectuated. The legislature has stepped in to cure the deficiency. The validating legislation and the amendment lay down the manner in which proportionate incentives would be computed. Such a course of action is legitimately open and cannot be regarded as being arbitrary or as violative of Articles 14 or 19(1)(g) of the Constitution. The principle of allowing pro-rata incentives subserves the object of the legislation. If the legislature has, as in the present case, determined that the purpose of the Package Schemes of Incentives should or would be achieved by allowing incentives to be computed on a proportional basis, that legislative assessment cannot be regarded as unconstitutional.”

The Hon. High Court accordingly upheld the retrospective validity and also justified levy of interest. However, the levy of penalty was held to be invalid for the period prior to the amendment. Accordingly, the Hon. High Court disposed of the petitions.

Nirav Shah

INPUT TAX CREDIT under VAT: Whether Ascertainment of Tax on Transaction is Required?

Introduction
After introduction of VAT in Maharashtra, getting input tax credit (ITC) has become a herculean task for dealers. A number of objections are raised while granting ITC (set off of tax paid on purchases). The basic objection is that it is the claimant buyer dealer who has to obtain confirmation of tax payment from the vendor. Thus, an impossible task is required to be accomplished by the buying dealers.

The difficulties are much more with the issue of ‘hawala’ dealers having surfaced. Everyone is now well aware that the Sales Tax Department has put up a list of more than 2,000 dealers as suspicious dealers, commonly described as ‘hawala’ dealers, on the website. In respect of ‘hawala’ dealers, no set-off is allowed irrespective of producing confirmation or any other supporting document. Neither assessment orders of the said vendors (so-called havala dealers) are passed nor crossexamination, to rebut the charge of non-genuine transactions etc., is allowed. Such actions of disallowing setoff, in the hands of purchasers, are against the principles of natural justice and invalid in the eyes of law.

Judgment in case of Mahalaxmi Cotton Ginning Pressing and Oil Industries, Kolhapur vs. The State of Maharashtra & Ors. (51 VST 1)(Bom)

In almost all such cases, the Department is relying on the judgment of the Hon’ble Bombay High Court in the above case. No doubt, in the above judgment, the Hon’ble High Court has upheld the Constitutional validity of section 48(5) of the MVAT Act, which provides that the ITC should not exceed the amount of tax paid on the said goods into the State Treasury. However, the Sales Tax Department is taking a stand that after above judgment the Department has nothing to do with vendors. Once the Department’s records show that there is no payment by the vendor, set-off can be disallowed without complying with any other process. For this purpose, the Department is verifying tax payment of vendors by their own means like non-filing of returns, non-availability of vendor or listed suspicious (hawala) dealer, etc.

We understand that if the Government has not received money on the same goods in its treasury than the set-off can be disallowed to the buyer as per the above judgment. But the disallowance cannot be a unilateral action. The Department has to follow the principles of natural justice.

It may be worthwhile to note that in above judgment Hon’ble High Court has not directed disallowance of set-off in the hands of all the buyers without assessment of vendor/s or without giving other opportunities as per law to the claimant buyer/s.

Ascertainment of tax payment on transactions is required

Therefore, the present procedure adopted by the Sales Tax Department is grossly erroneous. As per law, no set-off can be disallowed without ascertainment of tax payment on the given transaction and more particularly on the ‘goods’ involved.

The above position is reiterated as per the recent judgment of the Hon’ble Maharashtra Sales Tax Tribunal.

Gallery 7 vs. State of Maharashtra (VAT S.A. No.120 of 2011 dated 17-12-2012)

This is the judgment in which, amongst others, the issue of disallowance of set-off in relation to ‘hawala’ dealer is discussed and considered by the Hon’ble Tribunal. There were different reasons due to which set-off was disallowed on various purchase transactions. One of the purchases, on which set-off was disallowed, was from a declared ‘hawala’ dealer namely, M/s. Venkatesh Mercantile Pvt. Ltd. In the first appeal the set-off disallowance was confirmed. Therefore, this second appeal was filed before the Hon’ble Tribunal. After discussing the facts, the Hon’ble Tribunal has remanded the matter back to the first appellate authority with following directions:-

“14. We have considered the rival submissions. We have gone through the record underlying the assessment and the audit done by the assessing officer. We have also gone through the record underlying the appeal order.

i) The main issue in this appeal is about the claim of set-off. The levy of interest u/s. 30(3) is consequent to the dues of taxes which have arisen from disallowance of the claim of set-off. Quantum of penalty u/s. 29(3) is also dependant on the quantum of dues of tax and also the amount of set-off claimed in excess. It would therefore, be necessary to deal with the issue of claim of set-off. It is seen from the perusal of both the assessment order and the appeal order that this issue was not handled seriously by both the assessing officer and the appellate officer. While, in certain instances, the claim of set-off was disallowed by the assessing officer on the ground of non-production of tax invoice, it was allowed by the appellate officer on the ground that the seller was not traceable as reported by the sales tax inspector, the claim was allowed by the appellate officer just by observing that it could not be said that the seller was not doing business in the financial year 2006-2007 and there was no report of the sales tax inspector stating that no returns were filed and no tax was paid by the supplier. Without actually examining whether tax collected from the appellant was in fact paid by the supplier into the government treasury, set-off of an amount of Rs. 78,0375/- which was disallowed by the assessing officer was granted by the appellate officer. We are of the view that, it was necessary for the appellate officer to examine the claim and decide the admissibility of the claim not only on the basis of production or non-production of tax invoice but also after examining whether tax charged in the invoice by the supplier were paid into the government treasury or not. We are of the view that for proper appreciation of the issue, it would be necessary to remand the matter to the appellate officer with direction to him to examine the entire claim of set-off afresh in the light of the provision of section 48(5) of the MVAT Act. It would also be necessary to remand the matter to the appellate officer with the view to examine the appellants claim made in the written submission to grant further set-off in respect of the transactions of purchases allegedly effected by the appellant from M/s. Akshila Trade Ltd. and M/s. Bahubali Trading Pvt. Ltd. and M/s. Venkatesh Mercantile Pvt. Ltd. who were found to have defaulted in paying taxes allegedly collected from the appellant.” (Emphasis supplied)

This judgment lays down the correct position in respect of disallowance of set-off including where there is allegation of ‘hawala’ purchases. Unless there is ascertainment of tax payment on the transaction, the set-off cannot be disallowed. It clearly shows that merely on an allegation of the dealer being a hawala dealer set-off cannot be disallowed. It is expected that the lower authorities will follow the above decision and avoid disallowing set-off on a mere allegation of hawala purchase.

Assessment of hawala dealer
It is surprising that the Sales Tax Department is not taking any interest in the assessment of so called ‘hawala’ dealers or just avoiding the assessment of the suspicious vendors on the ground that they are declared ‘hawala’ dealers by them.

Devyani Trading Company vs. The State of Maharashtra (S.A.No.684 to 687 of 2010 dated 15-09- 2012)

In this judgment, the Hon’ble Tribunal has dealt with a similar situation where the vendor has submitted that his transactions are not of sale/ purchase, but financial transaction. In fact the registration of the vendor was cancelled on account of not doing genuine business.

In spite of the above, the dealer was assessed by the Enforcement Officer. In the second appeal, the stand was repeated that there was no genuine business and no tax should be levied. The Tribunal observed that there are transactions with other dealers and therefore, the stand of the appellant that he has not done genuine business cannot be accepted. The Hon’ble Tribunal observed as under:-

“6. The appellant has routed huge transactions through these banks and the State has definitely lost huge tax. The appellant were provided number of opportunities by the appellate Assistant Commissioner to prove that the transactions on financial transactions not involving sales. The transactions entered into or through the bank account of the appellant and the appellant cannot plead that he is not aware about the nature of these transactions. Crores of rupees transactions have been routed through these bank accounts and the appellant cannot say that these are financial transactions not liable to tax. In fact, the existence of these accounts and concealment of the information about their existence gives rise to mens rea.

The appellants have randomly taken various inspections of accounts and not cooperated with the department in explaining the matter in payment of tax and is squarely liable to pay the tax. Accordingly, we confirm the order passed by the Assistant Commissioner of Sales Tax (Appeals) and reject the Second Appeal petitions. Hence, the order.”

The legal position that emerges is that, under the name of ‘hawala’ no dealer can escape the legal liability. The Sales Tax Department not assessing the vendors under the name of ‘hawala’ is really illegal and it is causing great loss to the Government Treasury. It is expected that the Department will follow the above dictum of the Hon’ble Tribunal and avoid big loss of revenue to the Government. This will also save innocent buyers from illegal disallowance of set-off.

Conclusion

ITC is the lifeline of the VAT system. It has to have a sound, strong and logical apparatus. The dealer, while selling his goods considers the availability of set-off of taxes paid on his purchases. Any disallowance of set-off will be a direct loss to him. Therefore, before disallowing set-off u/s 48(5), due legal process is required to be followed by the Department. The above two judgments in relation to the issue, should certainly be taken as guidance by the Sales Tax Department.

Nirav Shah

Sale in course of Import vis-à-vis Works Contract

VAT

As per Article 286 of the Constitution of India, the
transactions taking place in the course of import and export are made immune
from levy of sales tax. In pursuance of the said article, the transactions of
sale/purchase in course of import/export are defined in S. 5 of the CST Act,
1956. The transaction of sale in course of import is defined in S. 5(2) of the
CST Act, 1956. The said Section is reproduced below.

“S. 5. When is a sale or purchase of goods said to take
place in the course of import or export :

(2) A sale or purchase of goods shall be deemed to take place
in the course of import of the goods into the territory of India only if the
sale or purchase either occasions such import or is effected by a transfer of
documents of title to the goods before the goods have crossed the Customs
frontiers of India.”

It can be seen that there are two limbs. As per the first
limb, the sale/purchase occasioning the movement of goods from foreign country
is considered to be in course of import. Therefore, the transaction of direct
import is covered by this category. In addition to the above, there is scope to
cover further transaction also as in course of import under this limb. For
example, after import of goods, they may be required to be delivered to local
party by way of sale. If inextricable link between import and such local sale is
established, then such local sale will also be deemed to be in the course of
import covered by the above first limb and it will be exempt.

The second limb covers transactions which are effected by
transfer of documents of title to goods before the goods crosses Customs
frontiers of India. However, discussion herein is about first limb and hence
this limb is not discussed further.

In relation to the first limb, there are a number of
judgments. However, in spite of the above, it is always a debatable issue. More,
there was no direct judgment of the Supreme Court in relation to first limb
vis-à-vis works contract transactions. Therefore, there were different views
in favour and against. However, now the Supreme Court had an occasion to deal
with the said controversy. The Supreme Court has given its judgment in the case
of Indure Ltd. & Another v. Commercial Tax Officer & Others, (34 VST 509)
(SC).

The facts of this case are that N.T.P.C. invited global bids
for its ash handling plant, Farakka Super Thermal Power Project. The contract
was termed as ‘on turnkey basis’. Indure Ltd. was one of the bidders. After
submission of the bid, there were personal meetings and Indure Ltd. was the
successful bidder. The contract was divided into two separate contracts, (i)
supply contract, and (ii) erection contract. However, even if the two contracts
were stated to be separate, the Supreme Court has observed that it was only one
contract, as N.T.P.C. kept right with it, with regard to cross-fall breach
clause, meaning thereby that default in one contract would tantamount to default
in another. Therefore the issue was decided considering the transaction as works
contract. Amongst others, there were terms about imported material. The said
clauses are reproduced in the judgment as under :

“4.5.1 . . . . . . . . . For equipment of non-Indian
origin, you shall submit the details of the indices and co-efficient in line
with the provisions of bid documents within three months of the date of this
award letter.

4.5.2 The list of components/material/equipment to be
imported by you, for which the adjustment on exchange rate variation is to be
made under US$, DM and J yen will be furnished by you within three months of
the date of this award letter. The items as declared as per these lists shall
only be eligible for exchange rate variation claims.”

In light of further deliberations with N.T.P.C., Indure Ltd.
was to import MS pipes from South Korea. The company thereafter submitted
application before the DGTD, Import Export Directorate, for Special Imprest
Import Licence against the above turnkey contract. The licence was granted
mentioning in it that all components to be imported were to be exclusively used
by Indure Ltd. for the above project. On the MS pipes so imported, special
markings mentioning the name of the project were made.

The above sale by Indure Ltd., to N.T.P.C. was claimed as
sale in course of import and hence exempt. The West Bengal Sales Tax authority
held that it was not obligatory for Indure Ltd. to import the goods. It was
contended that the only obligation of the company was to complete the project
and the components should meet the required specification, irrespective of fact
whether they are imported or otherwise. Therefore, the contention was that there
is no inextricable link and S. 5(2) of the CST Act, 1956 will not apply. The
above position was confirmed up to the High Court.

The Supreme Court dealt with the issue elaborately. It also
made reference to earlier decided cases. Citing judgment in the case of K.G.
Khosla & Co. (P) Ltd. v. Deputy Commissioner of Commercial Taxes, (17 STC
473) (SC), the Supreme Court reproduced the following para from the said
judgment :

“The next question that arises is whether the movement of
axle-box bodies from Belgium into Madras was the result of covenant in the
contract of sale or an incident of such contract. It seems to us that it is
quite clear from the contract that it was incidental to the contract that the
axle-box bodies would be manufactured in Belgium, inspected there and imported
into India for the consignee. Movement of goods from Belgium to India was in
pursuance of the conditions of the contract between the assessee and the
Director-General of Supplies. There was no possibility of these goods being
diverted by the assessee for any other purpose. Consequently we hold that the
sales took place in the course of import of goods within S. 5(2) of the Act,
and are, therefore, exempt from taxation.”

The Supreme Court also referred to the judgment in the case
of State of Maharashtra v. Embee Corporation, (107 STC 196) (SC). Further, the
Supreme Court also referred to the judgment in the case of Deputy
Commissioner of Agricultural Income-tax and Sales Tax, Ernakulam v. Indian
Explosives Ltd., (60 STC 310) (SC). The Supreme Court reproduced
observations from the above judgment and the following portion from the said
reproduced part is reproduced below :

“A sale in the course of export predicates a connection between the sale and export, the two activities being so integrated that the connection between the two cannot be voluntarily interrupted without a breach of the contract or the compulsion arising from the nature of the transaction. In this sense to constitute a sale in the course of export it may be said that there must be an intention on the part of both the buyer and the seller to export, there must be an obligation to export, and there must be an actual export. The obligation may arise by reason of statute, contract between the parties, or from mutual understanding or agreement between them, or even from the nature of the transac-tion which links the sale to export. A transaction of sale which is a preliminary to export of the commodity sold may be regarded as a sale for export, but is not necessarily to be regarded as one in the course of export, unless the sale occasions export. And to occasion export, there must exist such a bond between the contract of sale and the actual exportation, that each link is inextricably connected with the one immediately preceding it. Without such a bond, a transaction of sale cannot be called a sale in the course of export of goods out of the territory of India.

Conversely, in order that the sale should be one in the course of import, it must occasion the import and to occasion the import, there must be integral connection or inextricable link between the first sale following the import and the actual import provided by an obligation to import arising from statute, contract or mutual understanding or nature of the transaction which links the sale to import which cannot, without committing a breach of statute or con-tract or mutual understanding, be snapped.”

The Revenue sought to rely upon the judgment in the case of Binani Bros. (P) Ltd. v. Union of India, (33 STC 254) (SC). However the Supreme Court distinguished the same on facts.

In conclusion the Supreme Court allowed claim as in course of import in relation to the above works contract transaction. The judgment will certainly be a guiding one to resolve issue of sale in course of import vis-à-vis works contract transactions.

Nirav Shah

Nature of Lease Transaction – Update in Light of Recent Judgments

VAT

Nature of Lease Transaction – Update in Light of Recent
Judgments

The issue whether a transaction is taxable lease transaction
under Sales Tax Law or not, is a very debatable one. It is a judgment based
issue as the term ‘Lease Transaction’ (transfer of right to use goods) is not
defined in sales tax laws. From judgments delivered so far, it can be seen that
if there is delivery of possession to client, then taxable lease transaction
takes place. On the other hand, if there is no delivery of possession, i.e., if
effective control is not transferred to client, then there is no lease
transaction. Landmark judgments on the issue are as hereunder:

Rashtriya Ispat Nigam Ltd. 126 STC 114 (SC)

In this case amongst others, the Supreme Court has held that
in order to be a lease transaction, there should be delivery of possession to
the lessee. Unless effective control is given to the party, no lease transaction
takes place. The facts in this case were that Rashtriya Ispat Nigam Limited
allowed its contractor to use its machinery for the contract being executed for
it. One of the conditions of the contract was that the contractor was not free
to use the said machinery for any other work except for the contract executed
for Rashtriya Ispat Nigam Limited. The contractor was not allowed to move the
machinery outside the project area. Under above circumstances, the Supreme Court
held that there was no delivery of possession to amount as ‘transfer of right to
use goods’. Therefore, if the use is allowed under specified circumstances,
without freedom to the user, it cannot amount to taxable lease transaction.

Bharat Sanchar Nigam Ltd. 145 STC 91 (SC)

This is the latest case from the Supreme Court in the given
series. The issue in this case was about levy of lease tax on services provided
by telephone companies. The Supreme Court held that no sales tax was applicable
as the transaction pertained to service. While holding so, one of the learned
judges on the Bench observed the following (Para 98 below) about taxable lease
transaction:

“98. To constitute a transaction for the transfer of the
right to use the goods the transaction must have the following attributes:

There must be
goods available for delivery;

There must be a
consensus ad idem as to the identity of the goods;

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;

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;

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.”

At present, reliance is placed on above paragraph to decide
on the nature of the lease transaction. Subsequent judgments, relying and
analyzing on above judgments, are also now available. Reference can be made as
hereunder:

Alpha Clays 135 STC 107 (Ker)

In this judgment, the Hon. Kerala High Court has considered
the above judgment in case of Rashtirya Ispat Nigam Ltd. (Supra).

The Kerala High Court, amongst others, observed the
hereunder:

“From all the aforesaid decisions, it is clear that in order
to attract the provisions of section 5(1)(iii) of the Act, particularly the
expressions “transfer of the right to use goods”, there must be a parting with
the possession of the goods for the limited period of its use by the assessee in
favour of the lessees. In other words, so long as effective control of the goods
is with the assessee, the rent received from the customers for use of the goods
will not attract the provisions of section 5(1)(iii) of the Act. It is in those
circumstances, it has been held by this Court in Bahulayan’s case (1992) 1 KTR
137, that the hire charges received for use of the lorry is not exigible to tax
under section 5(1)(iii) of the Act, the effective control of the lorry was
always with its owner. It is on this principle, it was held in Rohini Panicker’s
case [1997] 104 STC 498 (Ker), that lending of video cassette for use by the
customers is exigible to tax under the Act, for the possession of the video
cassette is given to the customers for their use according to their will. It is
in view of this legal position, the Supreme Court in Aggarwal Brother’s case
[1999] 113 STC 317, has held that shuttering material is exigible to tax under
law.”

Similarly, based on
BSNL, now there
are a few more judgments. Reference can be made to the following recent
judgments:

Commissioner of Sales Tax v. Rolta Computers & Industries Pvt.
Ltd. 25 VST 322 (BHC)

In this case, the transaction was that the party allotted its
computer time to certain parties on exclusive basis. The Sales Tax Department
wanted to consider the said transaction as lease transaction relating to
computers. However, the Bombay High Court rejected the above plea. The Hon.
Bombay High Court, amongst others, observed the following:

“75.In our opinion, the essence of the right under article
366(29A)(d) is that it relates to user of goods. It may be that the actual
delivery of the goods is not necessary for effecting the transfer of the right
to use the goods but the goods must be available at the time of transfer, must
be deliverable and delivered at some stage. It is assumed, at the time of
execution of any agreement to transfer the right to use, that the goods are
available and deliverable. If the goods, or what is claimed to be goods by the
respondents, are not deliverable at all by the service providers to the
subscribers, the question of the right to use those goods, would not arise.”

In light of above, the Hon. Bombay High Court has held that allowing computer time does not fall in the category of lease transaction as no delivery of computer is made to the customer at any time.

Commissioner, VAT, Trade and Taxes Department v. International Travel House Ltd. 25 VST 653 (Delhi)

In this one more recent judgment, the Hon’ble Delhi High Court has observed the following:

“13.Sub-paras (b) and (c) of para 97 are important with reference to the facts of the case to determine as to whether or not there is a sale by virtue of transfer of right to use goods as envisaged in article 366(29A)(d). The admitted position which emerges is that the transferee, namely, NDPL, has not been made available the legal right to use the goods, viz., the permissions and licences with respect to the goods. In the present case, the permissions and licences with respect of the cabs are not available to the transferee and remained in control and possession of the respondent. It is the driver of the vehicle, who keeps in his custody and control the permissions and licences with respect to the Maruti Omni Cabs or the said permissions and licenses remained in possession of the respondent. These are never transferred to M/s NDPL. It, therefore, cannot be said that there is a sale of goods by transfer of right to use the goods. It is absent, namely, the ingredient as stated in para 97(c) of the Bharat Sanchar Nigam Ltd.’s case (2006) 3 VST 95 (SC); (2006) 145 STC 91 (SC); (2006) 3 SCC 1.”

A further observation is as follows:

“We may note that it has been held in the Division Bench judgment of the Allahabad High Court in Ahuja Goods Agency v. State of Uttar Pradesh (1997) 106 STC 540, that unless specified vehicles are transferred pursuant to the contract, there is no sale of the goods. It was also held that when it is the duty of the transporter to abide by all the laws relating to motor vehicles and excise, the custody remains with the owners of the vehicles and not the persons who have hired the vehicles, and, which again shows that there is no sale. We respectfully agree with the reasoning in Ahuja Goods Agency’s case (1997) 106 STC 540 (All). In the case before us also there are no identified goods as intended in para 97(b) of the Bharat Sanchar Nigam Ltd.’s case (2006) 3 VST 95(SC); (2006) 145 STC 91 (SC); (2006) 3 SCC 1 and hence no sale of goods. We also agree with the reasoning of the judgment in Lakshmi Audio Visual Inc. v. Assistant Commissioner of Commercial Taxes (2001) 124 STC 426 (karn) wherein R. V. Raveendran, J. (as he then was) held that when there is only hiring of audio visual and multimedia equipment, which equipment is at the risk of the owner and possession and effective control remain with the owners then, in such circumstances, it cannot be said that the customer had got the right to use the equipment and there was, therefore, no deemed sale. We may note that there are other single Bench judgments of the Allahabad High Court which follow the view of the Division Bench in the Ahuja Goods Agency’s case (1997) 106 STC 540 and we need refer to only on such judgments reported as Mohd. Wasim Khan v. Commissioner of Trade Tax, U.P., Lucknow (2009) 20 VST 196(All); (2006) 30 NTN 233, in which the contracts were those to providing buses for transportation of the employees of the companies from one place to another and which transaction was held to be not a sale because the driver and other employees of the vehicles were employees of the owners, the road permit was in the names of the owners who had to take insurance for the vehicles and the workmen and consequently it was held that there was no case of transfer of the right to use the goods because the effective control of the vehicle remained with the owners of the buses.”

Thus, the concept of the nature of lease transaction gets clear from the above judgments. Whether effective control is with the client, so as to make the transaction a taxable lease transaction has to be decided in light of such judgments .

Nirav Shah

Lease vis-à-vis License of Trade Mark

VAT

The State Governments are entitled to levy Sales Tax on the
transactions of ‘Transfer of right to use goods’ (also referred to as lease
transactions). This is possible as per provisions of Article 366 (29A) of the
Constitution of India. However, the nature of lease transaction is not defined
in the Constitution or in Sales Tax Laws. Therefore, whether lease transaction
has taken place or not has to be decided based on judicial interpretation
available so far. We can say that the interpretation about nature of taxable
lease transaction is still under development. However, some guidelines are
available from the recent judgment of the Supreme Court in the case of M/s.
Bharat Sanchar Nigam Ltd. (145 STC 91). Hon. Supreme Court has observed as under
for finding out taxable lease transaction :

“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 licences 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 licence to use the goods;

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 certain guidelines are available from the above
observations. However still a difficulty is experienced in relation to
intangible goods like trade mark, copy rights, etc. In relation to tangible
goods there cannot be difficulty in applying above guidelines. But in relation
to intangible goods the difficulty persists mainly due to nature of intangible
goods. Tangible goods, once delivered to lessee, cannot be further delivered to
any other person simultaneously and the above guidelines can be applied very
easily. However, intangible goods can be allowed to be used by number of persons
at a time, unless exclusive transfer of right to use is made to one lessee. In
respect of such type of transactions, i.e., where intangible goods are
involved, in Maharashtra, there is direct judgment of the Bombay High Court in
case of Dukes & Sons (112 STC 370).

In this case the issue before the Bombay High Court was about
tax on royalty amounts received for leasing of trade mark. The argument was that
since the trade mark is not given for exclusive use to one party, but is given
or is capable of being given for use to more than one party, there is no lease
transaction. The transaction was referred to as Franchise transaction. The
requirement of exclusive use or exclusive possession to transferee, for
considering transaction as lease, was given stress before the High Court.
However, the Bombay High Court held that since the nature of goods in this case
is intangible goods, the condition of exclusive use cannot apply. Accordingly,
the High Court held that even if the goods i.e., trade mark is leased to
more than one party, still the transaction is taxable as lease transaction.

Therefore, there was a situation that in relation to
intangible goods, the transactions were considered to be lease transactions in
spite of non-exclusive transfer of right. This judgment was delivered on 22nd
Sep. 1998. Therefore, after having the judgment of the Supreme Court in BSNL,
delivered on 02nd March, 2006, it was a feeling that the above judgment in case
of Dukes & Sons cannot be a good law.

A similar issue has now been decided by the Maharashtra Sales
Tax Tribunal. The reference is to the recent judgment of the Tribunal in case of
M/s. Smokin Joe’s Pizza Pvt. Ltd. (A.25 of 2004, dated 25-11-2008). In this case
the facts were that the appellant M/s. Smokin Joe’s was holding registered trade
mark for pizza i.e., “Smokin Joe’s”. The appellant has allowed this trade
mark to be used by others on franchise basis. In other words, due to franchise
agreement the franchisees were entitled to use the said trade name on their
premises as well as on the T shirts of the delivery boys, on packing materials,
etc. The appellant has entered into franchise agreement with such other parties
for above purpose. As per the franchise agreement, in addition to allowing above
use, the appellant has to provide number of other services, like helping in
layout of the premises, selection of raw materials, training to the staff,
instructions/know-how for method of manufacture of pizzas and delivery, etc. The
appellant was of the opinion that this is a licensing transaction and not a
lease transaction. In the alternative it was understood to be composite
transaction of lease and service and in absence of any authority to divide the
transaction into lease and service, it was considered as non-taxable transaction
under the then Maharashtra Lease Act. However for sake of legal order, an
application for determination was filed before the Commissioner of Sales Tax as
per the provisions of the Lease Act read with S. 52 of BST Act, 1959. In
determination order the Commissioner of Sales Tax held that the transaction is
covered by the Lease Act and hence liable to sales tax as leasing of trade mark.

In appeal before the Tribunal the appellant reiterated his
arguments. In addition, reliance was also placed on the judgment of the Supreme
Court in the case of Gujarat Bottling Co. Ltd. & Others (AIR 1995 Supreme Court
2372) where the nature of lease and licensing of trade mark has been discussed.
The appellant also relied upon judgment in the case of BSNL as referred to above
and also further fact that he is discharging liability under Service Tax
considering the transaction as of service. The clarification issued by the
Service Tax Authority, namely, vide Circular dated 28-6-2003, clarifying the
meaning of franchise was also relied upon.

The Tribunal made reference to the above position and came to the conclusion that in the given circumstances the transaction of franchise of trade mark is not lease transaction but amounts to licensing transaction. Therefore, the Tribunal held that no tax is payable on the above transaction under the Sales Tax Law.

The Tribunal in concluding Para observed as under:

“This Departmental clarification of the concerned authorities will be helpful to us to some extent to know the nature of the franchise agreement. It may be noted that in the franchise agreement as commonly understood the use of trade mark may not be involved. The basic equipment of franchisee agreement is that the franchisee has to follow the concept to business operation, managerial expertise, market techniques, etc. of the franchisor and to maintain standard and quality of such production as required by the franchisor. Thus only because the permission to use the trade mark has also been granted while entering into the franchise agreement, the said item of the agreement cannot be carved out from the main agreement of franchisee to hold that it as a transfer of right to use.

As such, after giving anxious consideration to all pros and cons of the matter, we are of the view that the impugned transaction does not involve the transfer of right to use the trade mark. It is a licence granted to use the trade mark simultaneously to various persons. It is a composite agreement of providing various services to ensure the standard and quality of the product in order to maintain the reputation of the franchisor and permission to use the trade mark is incidental. It is therefore, not covered under the Lease Act and the levy is not justified.”

In the light of above judgment of the Tribunal it can also be said that the judgment of Dukes & Sons is indirectly overruled by the judgment in the case of BSNL.The ratio of the above Tribunal judgment will also apply to many other intangible goods, like copyright, technical know-how, etc., if in relation to such transactions it can be shown that there is no exclusive right given to the lessee. It will not be a lease transaction, but it will be a licensing transaction not covered by Sales Tax Laws. In other words, the law explained by the Supreme Court in para 98 reproduced above will apply to all goods, whether tangible or intangible. The taxability as a lease transaction is to be decided in the light of above judgment of BSNL. This judgment will also clarify the position as to when a transaction will be other than lease, where Service Tax can be attracted.

Nirav Shah

Works Contract executed through Sub-contractor — Whether single transaction or multiple transactions ?

VAT

A very interesting question was dealt with by Andhra Pradesh
High Court in the case of Larsen & Toubro Ltd. & Others, reported in 148 STC 616
(A.P.). The facts were that L&T received a contract from its customer (contractee).
Part of the contract was executed through subcontractors. The sub-contractors
had issued tax invoices to L&T and tax on the same was paid by the respective
sub-contractors. L&T was assessed for the period 1-4-2005 to 31-1-2006 under A.P.
VAT Act. In the returns filed for the above period, L&T had not included the
turnover affected through subcontractors. The Assessing Officer was of the view
that such turnover is includible in the turnover of L&T.

L&T argued that there was no such need in view of particular
provisions of the A P Vat Act and also on the principle of single transaction
theory. In other words, L&T contended that there was direct sale by the
subcontractors to the contractee and hence no turnover of subcontractor was
includible in its turnover. The Assessing Officer held that there was sale by
subcontractor to L&T i.e., to the principal contractor and again by L&T
to the contractee. In view of the above, the Assessing Officer held the turnover
affected through subcontractors as liable to tax in the hands of L&T. L&T filed
writ petition in the Andhra Pradesh High Court. The High Court held that in view
of the established position by the judgment of Supreme Court in the case of
Builders’ Association of India (73 STC 370), the turnover of subcontractor is
not includible in the turnover of L&T.

Against the above judgment the State of A.P. filed SLP in the
Supreme Court. The Supreme Court has now decided this issue vide its judgment in
State of Andhra Pradesh and Others v. Larsen & Toubro Ltd. & Others. The
judgment is reported in 2008 VIL 30 SC dated 26-8-2008. The Supreme Court has
dealt with the issue in the light of specific provisions of the A.P. VAT Act and
also the Constitution’s provisions like Article 366(29A)(b).

The Supreme Court observed that there can be two types of
works contracts : one, relating to construction and two, relating to movable
properties like repairs, etc. . . After taking note of the judgment of the
Supreme Court in the case of Gannon Dunkarley and Co. (9 STC 353), the Supreme
Court referred to the 46th amendment made to the Constitution by which deemed
sale categories were provided by way of Article 366 (29A). The Supreme Court
also observed that the above amendment to the Constitution has been approved by
the Constitution Bench in the case of Builders’ Association of India (73 STC
370). The Supreme Court also noted the provision in the A.P. Act which provides
for payment of tax on the value of the goods at the time of incorporation of
such goods in the works executed at the rates applicable to the goods. In
the light of above, the Supreme Court held that the taxable event is transfer of
property in goods involved in the execution of works contract and the said
transfer of property takes place when the goods are incorporated in the works.
The value at such point of time is a taxable value. In view of the above
provision, the Supreme Court observed that the scheme of taxation indicates that
there is a ‘deemed sale’ by the dealer executing the work, i.e., in this
case the subcontractor. The Supreme Court further observed that it is the
sub-contractor only, who affects transfer of property in goods, as no goods
vests in the main contractor, so as to be subject matter of a re-transfer. The
Supreme Court, in fact, observed as under :

“‘By virtue of Article 366 (29A)(b) of the Constitution
once the work is assigned by the contractor (L&T), the only transfer of
property in goods is by the subcontractor(s) who is a registered dealer in
this case and who claims to have paid taxes under the Act on the goods
involved in the execution of the works. Once the work is assigned by L&T to
its subcontractor(s), L&T ceases to execute the works contract in the sense
contemplated by Article 366(29A)(b), because property passes by accretion and
there is no property in goods with the contractor which is capable of a
re-transfer, whether as goods or in some other form.

17. The question which is raised before us is : whether the
turnover of the subcontractors (whose names are also given in the original
writ petition) is to be added to the turnover of L&T. In other words, the
question which we are required to answer is : whether the goods employed by
the subcontractors occur in the form of a single deemed sale or multiple
deemed sales. In our view, the principle of law in this regard is clarified by
this Court in the case of Builders’ Association of India (supra) as
under :

“Ordinarily, unless there is a contract to the contrary, in
case of works contract the property in the goods used in the construction of a
building passes to the owner of the land on which the building is constructed,
when the goods or materials used are incorporated in the building.”

On behalf of the State of A.P. the argument was that there
are two deemed sales i.e., one from subcontractor to main contractor and
the other from main contractor to contractee. It was emphasised that contractee
has no privity of contract with the sub-contractor, hence it cannot be a single
transaction. On the above line of argument, the Supreme Court observed as
under :

“19. If one keeps in mind the above-quoted observation of this Court in the case of Builders’ Association of India (supra), the position becomes clear, namely, that even if there is no privity of contract between the contractee and the subcontractor, that would not do away with the principle of transfer of property by the subcontractor by employing the same on the property belonging to the contractee. This reasoning is based on the principle of accretion of property in goods. It is subject to the contract to the contrary. Thus, in our view, in such a case, the work executed by a sub-contractor results in a single transaction and not as multiple transactions. This reasoning is also borne out by S. 4(7) which refers to value of goods at the time of incorporation in the works executed. In our view, if the argument of the Department is to be accepted, it would result in plurality of deemed sales which would be contrary to Article 366(29A) (b) of the Constitution as held by the impugned judgment of the High Court. Moreover, it mayresult in double taxation which may make the said 2005 Act vulnerable to challenge as violative of Articles 14, 19(1) (g) and 265 of the Constitution of India as held by the High Court in its impugned judgment.”

Thus, it can be said that the legal position which emerges at present is that in relation to construction activity, even though the subcontractors are involved, still there cannot be multiple transactions. The taxation will be only once. The Supreme Court has not dealt with the issue about such transactions in relation to moveable properties. It also appears that in relation to construction activity if there is anything contrary to the above understanding, then the position may be different. This is evident from observations in para 19 reproduced above. It may also be worth noting that in relation to similar construction activity, in case of L&T only, the Karnataka High Court has taken a different view while dealing with levy of turnover tax under the erstwhile Karnataka Sales TaxAct and it is held that there are multi-point transactions, one from subcontractor to main contractor and the other from main contractor to contractee. This judgment is reported in 16 VST 616. However, the judgment is dated 3-2-2006, that is prior to the above Supreme Court judgment. In view of this latest judgment of the Supreme Court, the controversy should be laid to rest.

Recent amendment – Scope of E-filing of returns expanded:
The Commissioner of Sales Tax, Maharashtra State, has issued Notification under Rule 17(5)(a) of the MVAT Rules, 2005 dated 30-8-2008. By this Notification the scope of E filing of returns has been expanded. Hitherto, dealers having tax liability exceeding Rs.I0 lakhs or refund exceeding Rs.l crore in the previous year (i.e., liable to file monthly returns) were liable to file E-returns. Now dealers having tax liability exceeding Rs.l lakh or refund exceeding Rs.I0 lakhs in the previous year are also made liable to file E-returns. In other words, in addition to dealers filing monthly returns, dealers filing quarterly returns are also now required to file E-returns. This position applies from the quarter starting 1st July, 2008. Therefore, for the quarter ending 30th September, 2008 and onwards, dealers covered by provisions of quarterly returns, will be required to file their returns by way of E-returns. Dealers filing monthly returns will continue to file E-returns, as earlier.

Nirav Shah

‘SALE PRICE/TURNOVER’ FOR LEVY OF CST

Introduction :

Once the transaction is held to be a sale, the next question which arises is the quantum on which such tax is leviable. This is referred to as ‘sale price’ in relation to individual transaction and ‘turnover’ in relation to aggregate of transactions during a particular period. There may be a number of different elements which require consideration while determining sale price/turnover.

Definitions :

Under the CST Act, 1956, the above terms are defined as discussed below :

“(h) ‘sale price’ means the amount payable to a dealer as consideration for the sale of any goods, less than any sum allowed as cash discount according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof other than the cost of freight or delivery or the cost of installation in cases where such cost is separately charged;

Provided that in the case of a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, the sale price of such goods shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to be the sale price for the purposes of this clause.”

“(j) ‘turnover’ used in relation to any dealer liable to tax under this Act means the aggregate of the sale prices received and receivable by him in respect of sales of any goods in the course of inter-state trade or commerce made during any prescribed period and determined in accordance with the provisions of this Act and the rules made thereunder.”

From the definition of sale price, it appears that though all amounts charged to the buyer till delivery is given are to be considered as sale price, the amount charged separately for freight is not to be included in the sale price.

Interpretation of above definitions :

However, interpretation of the above definitions have attracted lengthy litigations. There are a number of judgments interpreting the above terms.

Recently, the Supreme Court had an occasion to deal with the above aspect. The Supreme Court has delivered judgment in case of India Meters Ltd. v. State of Tamil Nadu (34 VST 273).

In this case, the facts were that the appellant, M/s. Indian Meters Ltd. (referred to as dealer) sold meters manufactured by it to its customers within and outside Tamil Nadu. The dealer had charged applicable tax i.e., Tamil Nadu Sales Tax or Central Sales Tax on the price charged by it. The dealer had also collected separately amounts from the buyers towards freight charges, by raising debit notes. The dealer had not paid tax on the above amounts. The Sales Tax Authorities held that these amounts are also part of sale price and accordingly levied tax on the same under the respective Acts.

Though, the Tamil Nadu Sales Tax Appellate Tribunal held in favour of dealer, the High Court held that the said amounts are part of sale price and turnover and therefore correctly held as liable to tax.

The matter came before the Supreme Court. The Supreme Court examined the facts. It was found that the clause in the sale contract provided that the transfer of title to the goods was to take place only on delivery of goods at customer’s place and the customer’s obligation to pay would arise only after the delivery had been so effected. Simultaneously it was also found that there was a clause in the contract dealing with the price. It was provided that the price was payable per unit, ex-factory delivery. The Clause further provided that sales tax and excise duty will be payable only on ex-factory price.

Based on the above terms and conditions, it was argued by the dealer that since the prices are ex-factory and freight is charged separately, the said freight was not chargeable to tax. Various judgments were cited before the Supreme Court.

Supreme Court’s ruling :

The Supreme Court has confirmed the view of the High Court.

The Supreme Court observed that in the present case, the obligation to pay the freight was clearly on the dealer, as no sale could have taken place unless the goods were delivered at the premises of the buyer. It was further observed that for giving such delivery incurring cost of freight was required on part of the dealer. The Supreme Court held that though the contract mentioned the price as ex-factory price, the delivery was not at the factory gate. Therefore, the specification of what the price would be at the factory gate cannot have any impact on the place of delivery, held the Supreme Court. The Supreme Court also observed that had the delivery been completed at the factory gate, then the expenses incurred thereafter by way of freight could have been categorised as post-sale expenses and could not have been taxable. Thus, ultimately the Supreme Court confirmed the levy. The Supreme Court reproduced legal position in the following manner.

“In Paprika Ltd. v. Board of Trade, (1944) 1 ALL ER 372, the Court observed as under :

“Whenever a sale attracts purchase tax, that tax presumably affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even the price is expressed as ‘X’ plus purchase tax.”

In this case, the learned judge also quoted with approval what Goddard, L.J., said in Love v. Norman Wright (Builders) Ltd., (1944) 1 All ER 618:

“Where an article is taxed, whether by pur-chase tax, customs duty or excise duty, the tax becomes part of the price which ordinarily the buyer will have to pay. The price of an ounce of tobacco is what it is because of the rate of tax, but on a sale there is only one consider-ation though made up of cost plus profit plus tax. So, if a seller offers goods for sale, it is for him to quote a price which includes the tax if he desires to pass it on to the buyer. If the buyer agrees to the price, it is not for him to consider how it is made up or whether the seller has included tax or not” and summed up the position in the following words:

“So far as the purchaser is concerned, he pays for the goods that the seller demands, namely, the price even though it may include tax. That is the whole consideration for the sale and there is no reason why the whole amount paid to the seller by the purchaser should not be treated as the consideration for the sale and included in the turnover.”

The Supreme Court further referred to settled position as under:

“This Court had an occasion to deal with identical issues in the case of Hindustan Sugar Mills (1978) 4 SCC 271. P. N. Bhagwati J. (as His Lordship then was), clearly held that by reason of the provisions of the Control Order which governed the transactions of sale of cement entered into by the assessee with the purchasers in both the appeals before us, the amount of freight formed part of the ‘sale price’.

In this judgement, the Court comprehensively explained the entire principle of law by giving an example in para 8 of the judgment which reads as under:

“8. Take for example, excise duty payable by a dealer who is a manufacturer. When he sells goods manufactured by him, he always passes on the excise duty to the purchaser. Ordinarily, it is not shown as a separate item in the bill, but it is included in the price charged by him. The ‘sale price’ in such a case could be the entire price inclusive of excise duty, because that would be the consideration payable by the purchaser for the sale of the goods. True, the excise duty component of the price would not be an addition to the coffers of the dealer, as it would go to reimburse him in respect of the excise duty already paid by him on the manufacture of the goods. But, even so, it would be part of the ‘sale price’, because it forms a component of the consideration pay-able by the purchaser to the dealer. It is only as part of the consideration for the sale of the goods that the amount representing excise duty would be payable by the purchaser. There is no other manner of liability, statutory or otherwise, under which the purchaser would be liable to pay the amount of excise duty to the dealer. And, on this reasoning, it would make no difference whether the amount of excise duty is included in the price charged by the dealer or is shown as a separate item in the bill. In either case, it would be part of the ‘sale price’. So also, the amount of sales tax payable by a dealer, whether included in the price or added to it as a separate item, as is usually the case, forms part of the ‘sale price’. It is payable by the purchaser to the dealer as part of the consideration for the sale of the goods and hence falls within the first part of the definition?….”

Ratio of Supreme Court judgement:

The ratio of the judgement is required to be seen carefully. Even if the freight is collected separately, if the delivery is at the door of the customer, then in spite of the above exclusion of freight from the definition of sale price, it will be includible in the sale price and taxable.

The further ratio which comes out is that if it is established that the delivery is given at the seller’s place and the freight charges are incurred thereafter, then the said collection can be considered as post-sale collection. It will also be considered as reimbursement of expenditure made on behalf of the buyer. In such circumstances, it will not be taxable.

We hope the above judgement will settle the controversy for all time to come and the dealers can determine the taxation of freight accordingly.

Nirav Shah

New VAT Audit Form-704

S. 61 of The Maharashtra Value Added Tax Act, 2002 (MVAT Act) requires certain dealers to get their books of account audited and submit Audit Report so obtained from the Auditor i.e. either from a practising chartered accountant or a practising cost accountant. This report is required to be submitted within 10 months from the end of the financial year. Non-filing or late filing of Audit Report may attract penalty at the rate of 0.1% of the turnover of sales. The prescribed form of Audit Report (i.e. Form 704) has been replaced recently vide notification dated 26-8-2009 issued under Rule 17A(2) of MVAT Rules, 2005. The revised form of audit report is applicable for financial years commencing on or after 1st April 2008. Thus, from 26th August 2009 onwards, the VAT Audit Reports for F.Y. 2008-09 have to be given in this amended Form 704 only. Further, the Commissioner of Sales Tax, vide Notification dated 1st October 2009, has notified electronic format of Form 704 to facilitate the dealer to file the Audit Report electronically. From 1st October 2009 onwards all such dealers shall file the Audit Report in electronic format only.

Some of the important distinguishing features of this new form may be noted as under :

1. Emphasis shifted from returns to tax liability.

In the earlier report the main thrust was to certify the correctness and completeness of the returns filed by the dealer. In the new Form, the thrust is on certification of tax liability of the dealer based on his books and records.

2. In the earlier report for almost each column and row, remarks from the Auditor were asked for. This was creating confusion and every Auditor followed different way of giving such remarks. Some of the publications even gave suggested remarks for each such column. The new Audit Form is designed in such a way that all remarks will get reported at one or two specified places only viz. para-3 or para-5 of Part-1. This will be helpful to the Auditor as well as the user.

3. Most important distinguishing feature is that this new Audit Report is to be filed electronically. The earlier Report was to be filed physically. The Commissioner of Sales Tax has issued Circular bearing No. 27T of 2009 dated 1-10-2009 by which the procedure for e-filing of this Report has been clarified. Though, Auditor will give his Report to the dealer, the dealer will upload the same. Therefore, the Auditor may be required to give Report in Electronic Format along with physical copy to facilitate the dealer to file new Report Form. After uploading the Report the dealer is also required to submit ‘statement of submission’, as explained in the above Circular.

4. The new VAT Audit Form has three parts. Part-1 is about certification, whereas Part-2 is about general information of the dealer and Part-3 is about calculation of tax liability.

In Part-1, at the beginning, there are certain instructions to be followed by the auditor. There are about 19 instructions. The rule making authority has given weightage to these instructions, in as much as in the Certification Part the Auditor has to certify that he has read and understood the instructions and followed the same while preparing the Report. Thus, the Auditor is expected to follow the instructions and in any case, if not in position to follow the same, he will be required to report in para-3 of Part-1.

5. As stated above, Part-1 is about certification. Para-2(B) of Part-1 starts as under :

“Subject to *my/our remarks about non-compliance, short comings and deficiencies in the returns filed and tax liability computed and presented in respective schedules and Para-4 of this Part, I/We certify that,. . . . .”

Thus, an impression arises that this is not a Report as such but certification. Report is generally an opinion based on the overall verification of the records, certification means certifying correctness of the facts so certified. For example, if a ‘debtors list’ is certified as per any records, then such certification is expected to be correct as per actual amounts, leaving no difference even of Rupee or Paisa. Therefore, an issue may arise whether the VAT Auditor is giving certification, so that the amounts/tax liability mentioned in the Audit Report are verified fully in all its respects, including 100% accuracy of various claims. In certification in para-2(B), there are certain items, mentioning that the Auditor has fully verified the facts stated therein. For example, in clause (i) the Auditor certifies that ‘all such declarations and certificates are produced before me. I have verified the same and they are in conformity with the provisions related thereto’.

Due to these kind of certification, question arises whether the Auditor is supposed to check each and every declaration form (like ‘C’ form), physically and that also with correctness of the details mentioned therein. There are certain more items of similar nature. Therefore, it is necessary to understand the scope of VAT Audit.

To our understanding, though above is the mode of reporting, Audit Report is still an expression of opinion only and it is not a certification as understood in that manner. This aspect is clear from the overall reading of the Form, particularly from the reading of the responsibility statement after para-1C in Part-1. The said statement is as under :

“Maintenance of books of accounts, sales tax related records and preparation of financial statements are the responsibilities of the entity’s management. Our responsibility is to express an opinion on their sales tax related records based on our audit. We have conducted our audit in accordance with the standard auditing principles generally accepted in India. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the sales tax related records and financial statements are free from material mis-statement(s). The audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates by management as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.”

Based on above responsibility statement, it can be said that the report is in the form of opinion and not a certificate as such. Therefore, the Auditor can give the specified certificates in para-2(B) of Part-1, based on his satisfaction from the verification, which may include test verification of the relevant records. However, it is expected that the Auditor will maintain his working papers meticulously.

In Part-1 of new Form 704, the VAT Auditor has also to give a summary of total tax liability in a tabular format. Unlike the old Form, in new Form the Auditor is not to give any recommendation for revising the returns, etc. He has to only report about additional liability or refunds etc. The dealer will take his own decision to revise the returns accordingly or not. [There is amendment in S. 20(4) of MVAT Act, 2002 which is about revised returns. S. 20(4)(b) is about revising the returns pursuant to Audit Report. From reading of said section, it transpires that the dealer will be required to revise each individual return, as per the changes required in the same. In relation to old Form, the then Commissioner of Sales Tax had issued Circular 26T of 2006 dated 18-9-2006 by which the dealer was able to revise only last return, to take care of all the changes during the audit period. Thus, the responsibility of the dealer has increased.]

In Part-2, general information is called for. As compared to old Form, certain new requirements have been added. Like details about filing of returns and payment under Profession Tax Act/Luxury Tax Act etc. Though, strictly speaking, in the VAT Audit Report, details about other enactments can not be asked for, but, it appears that since the other enactments are also administered by the sales tax department, these details are asked for. The other distinguishing feature in Part-2 is that the Activity Code is also required to be reported. These Activity Codes are made available on government website and the Auditor, after selecting applicable codes has to give bifurcation of turnover qua such codes.

Part-3 is about computation of liability. It has six schedules and eleven Annexures. Schedules I to V are for reporting transactions under MVAT Act, 2002, whereas Schedule-VI is about reporting trans-actions under CST Act, 1956. As clarified in the Instructions, the Schedules are as per return format. Under MVAT Act, 2002, there are different type of returns viz. From Nos. 231, 232, 233, 234 & 235. Schedule-I relates to Form No. 231 and so on. It is also possible that more then one Schedule may apply, depending upon the type of returns applicable to the said dealer.

In addition to the Schedules, there are also Annexures from ‘A’ to ‘K’. These are supplementary to Schedules. In the Electronic Format, if the information is first filled up in the Annexures, related fields in the Schedules and Tables will be auto calculated. Though, there can be various minute details about each item of the Schedules/Annexure, for sake of brevity, the same are not discussed here. However, some of the additional items in this new Form, as compared to old Form, can be mentioned as under:

i) List of new suppliers on the purchase of which set off is claimed. (Annexure ‘G’. However, this Annexure is dropped in E-template).

ii) List of TIN wise suppliers showing total purchases and taxes. (Annexure ‘J’).

iii) List of TIN wise purchasers showing total sales and taxes. (Annexure ‘J’). At present, there is no requirement for noting the TIN of the purchasers and hence, probably the dealer may not have these details available. Depending upon the availability of such information and verification thereof to his satisfaction, the Auditor may have to give suitable disclosures.

iv) List of credit notes, party wise, showing amounts and taxes. (Annexure ‘J’).

v) List of debit notes, party wise, showing amounts and taxes. (Annexure ‘J’).

vi) Ratio analysis. (Annexure ‘F).

vii) Bank statement examination, for certification as per para-2(B)(m) of Part-I.

viii) Stock records requirement for reporting at – various places.

ix) Reconciliation with Excise/Custom records. (Instruction-19).

x) Interest working as per (Annexure ‘A’ & ‘B’).

The new Audit Form-704 is more elaborate. It also requires more details than the old one. In the first year, it seems, it may be little difficult for some of the dealers to generate certain information required to be furnished in some of the annexures and in certain cases it may involve additional work. However/ in subsequent years, one may have to take care to get their accounting software suitably amended and also the procedure for maintaining primary records so as to generate the required information in the manner so required. It appears that in long run, the new Form will be much more dealer friendly.

Nirav Shah

LEASE TRANSACTION — IMPORTANT JUDGMENT ABOUT LEASE OF ‘SPACE SEGMENT CAPACITY’ IN TRANSPONDERS IN SATELLITE

Vat

Introduction :

Whether a particular transaction is a transaction for
‘Transfer of Right to use goods’ (Lease transaction), so as to be liable under
Sales Tax Laws, is always an issue of contest. There are a number of judgments
analysing the scope of deemed sale by way of lease transaction. Mainly two
aspects are required to be determined. One is, whether the subject matter of
transaction is ‘goods’ and the other one is, whether on the facts of the case
the transaction is of lease or not. If answer to both the issues is yes, the
next

issue arises is about situs of lease transaction.

Criteria for determining nature of lease transaction :

Up till today there are a number of judgments specifying the
criteria for determining the nature of lease transaction. Reference can be made
to the judgments in following cases :

(a) Rashtriya Ispat Nigam Ltd., (126 STC 114) (SC)

In this case, amongst others, the Supreme Court held that to
be a lease transaction, there should be delivery of possession to the lessee.
Unless effective control given to party, no lease transaction takes place.

(b) Bharat Sanchar Nigam Ltd., (145 STC 91) (SC)

The issue in this case was about levy of lease tax on
services provided by telephone companies. The Supreme Court held that no such
tax is applicable as the transaction pertains to service. While holding so, one
of the learned Judges on the Bench observed as under in para 98 about the nature
of taxable lease transaction :

“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 licences 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 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, it can be said that whether a lease sale has taken
place or not, can be decided in light of the above criteria laid down by the
Supreme Court.

(113 STC 317) (SC)

In this case the dealer has allowed its shunting material to
the contractor to whom it has awarded contract for construction. Rent was
charged for the same. In this case the Supreme Court observed that to the extent
the shunting material is handed over to the contractor, the delivery of
possession takes place and therefore the transaction is liable to lease tax.

In light of the above judgments the criteria becomes clear
that if effective control is passed on to the lessee, then lease transaction
takes place, otherwise not.

Whether subject matter of transaction is ‘goods’

The second issue is to decide about the nature of item, which
is subject matter of lease transaction. If it is goods, then only taxable lease
transaction can take place. The term, ‘goods’, is also analyzed in various
judgments. Brief reference can be made to the following important judgments :

(a) Bharat Sanchar Nigam Ltd., (145 STC 91) (SC)

In relation to meaning of goods the Supreme Court has
observed as under :

“54. The judgment in that decision is awaited. For the time being, we will assume that an incorporeal right is ‘goods’.

55. In fact the question whether ‘goods’ for the purpose of sales tax may be intangible or incorporeal need not detain us. In Associated Cement Companies Ltd. v. Commissioner of Customs, (2001) 4 SCC 593, the value of drawings was added to their cost since they contained and formed part of the technical know-how which was part of a technical collaboration between the importer of the drawings and their exporter. It was recognized that knowledge in the abstract may not come within the definition of ‘goods’ in S. 2(22) of the Customs Act.

56. This view was adopted in Tata Consultancy Services v. State of Andhra Pradesh for the purposes of levy of sales tax on computer software. It was held :

“A ‘goods’ may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software, whether customised or non-customised, satisfies these attributes, the same would be goods.”

57. This in our opinion, is the correct approach to the question as to what are ‘goods’ for the purposes of sales tax. We respectfully adopt the same.”

(b) Tata Consultancy Services, (137 STC 620) (SC)

In para 17 the Supreme Court has observed as under :

“17. Thus this Court has held that the term ‘goods’, for the purposes of sales tax, can-not be given a narrow meaning. It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed, etc. are ‘goods’ for the purposes of sale tax. The submission of Mr. Sorabjee that this authority is not of any assistance, as a software is different from electricity and that software is intellectual incorporeal property whereas electricity is not, cannot be accepted. In India the test, to determine whether a property is ‘goods’, for purposes of sales tax, is not whether the property is tangible or intangible or incorporeal. The test is whether the concerned item is capable of abstraction, consumption and use and whether it can be transmitted, transferred, delivered, stored, possessed, etc. Admittedly in the case of software, both canned and uncanned, all of these are possible.”

Situs of lease transaction:

If a lease transaction is a taxable lease transaction under Sales Tax Laws, then further issue is about the situs, i.e., where the sale has taken place. In this respect reference can be made to landmark judgment in case of M/s. 20th Century Finance Corporation Ltd. v. State of Maharashtra, (119 STC 182) (SC). In this case the Supreme Court has laid down as under about situs of lease transaction.

“35. As result of the aforesaid discussion our conclusions are these:

…………………….

The appropriate Legislature by creating legal fiction can fix situs of sale. In the absence of any such legal fiction the situs of sale in case of the transaction of transfer of right to use any goods would be the place where the property in goods passes, i.e., where the written agreement transferring the right to use is executed.

Where the goods are available for the transfer of right to use the taxable event on the transfer of right to use any goods is on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use.

In cases of where goods are not in existence or where there is an oral or implied transfer of the right to use goods, such transactions may be effected by the delivery of the goods. In such cases the taxable event would be on the delivery of goods.
The transaction of transfer of right to use goods cannot be termed as contract of bailment as it is deemed sale within the meaning of legal fiction engrafted in clause (29A)(d) of Article 366 of the Constitution wherein the location or delivery of goods to put to use is immaterial.”

Under the above background the Karnataka High Court had an occasion to deal with taxability of a particular transaction under the Karnataka VAT Act which is dealt with in the following judgment.

Antrix Corporation v. Asst. Commissioner of Commercial Taxes, (29 VST 308) (Kar.):

In this judgment, delivered on 6-2-2010, the issue was about taxability of transaction of hiring of space segment capacity on transponders attached to IN-SAT Satellites. The facts are that, under the authority from the Department of Space of Government of India, the dealer entered into agreements with private parties for hiring of space in the satellite. The Sales Tax authorities considered the transaction as lease of goods liable to tax under the Karnataka VAT Act. The High Court has upheld the action of the sales tax authorities.

The High Court based on judgments cited above about ‘goods’, observed that the ‘Space Segment Capacity’ in transponders is goods by itself. The High Court also noted that they are capable of giving exclusive control to the parties. In respect of effective control the High Court observed that though the technical control on the satellite is of the dealer, (the satellite being controlled and operated by them), the ‘legal control’ is with the lessee. In respect of situs the High Court observed that though the satellite, in which the space is located and which is given on hire, is in orbit, which is 36000 kms away from the earth, still since the agreement is executed in Karnataka the situs will be in Karnataka. Accordingly the High Court justified the assessment of hire charges for space under Karnataka VAT Act, rejecting the writ petition of the dealer.

Conclusion:

The judgment will have considerable impact upon the judicial interpretation of nature of lease transaction.

Nirav Shah

Some Important Judgments Priority of Government Dues

Central Bank of India vs. State of Kerala and Others (21 VST 505)(SC)

The facts before the Hon’ble Supreme Court were that the bank gave credit facilities to dealers against mortgage of moveable and immovable properties. When the bank sought to recover money by sale of properties through the Debts Recovery Tribunal (DRT) the Sales Tax Department intervened saying that by virtue of specific provisions in the State Sales Tax Acts (like Section 26B in the Kerala Act and Sec.38C in the BST Act, 1959) sales tax recovery has priority and first charge. The banks were insisting that since the properties are mortgaged to them and since recovery is under Central legislations viz., the DRT Act, 1993 they have priority. The respective High Courts of Kerala and Bombay held in favour of State Sales Tax Authorities. Hence matters were taken to the Supreme Court by respective banks. The Supreme Court confirmed the orders of the High Courts. Various constitutional challenges were raised. The Supreme Court, after dealing with same, rejected the said challenges.

Short gist of observations on constitutional issues is as under :

The Supreme Court held that Article 254 of the Constitution gets attracted only when both Central and State legislations have been enacted on any of the matters enumerated in List III in the Seventh Schedule to the Constitution and there is conflict between the two legislations. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 have been enacted by the Parliament under Entry 45 in List I in the Seventh Schedule, whereas the Bombay Sales Tax Act, 1959 and the Kerala General Sales Tax Act, 1963 have been enacted by the concerned State Legislatures under Entry 54 in List II in the Seventh Schedule. The two sets of legislations have been enacted with reference to entries in different Lists in the Seventh Schedule. Therefore, the Supreme Court held that Article 254 cannot be invoked for striking down the State legislations on the ground that they are in conflict with the Central legislations. The Supreme Court held that there is no ostensible overlapping between the two sets of legislations.

The Supreme Court observed that there is no provision in either of 1993 or 2002 enactments by which a first charge has been created in favour of banks, financial institutions or secured creditors qua the property of the borrower. Under Section 13(1) of the 2002 Act, limited primacy has been given to the right of a secured creditor to enforce his security interest vis-à-vis Section 69 or Section 69A of the Transfer of Property Act. In terms of that sub-Section, a secured creditor can enforce security interest without intervention of the Court or Tribunal and if the borrower has created any mortgage of the secured asset, the mortgagee or any person acting on his behalf cannot sell the mortgaged property or appoint a receiver of the income of the mortgaged property or any part thereof in a manner which may defeat the right of the secured creditor to enforce security interest. The Supreme Court held that this primacy has not been extended to other provisions like Section 38C of the Bombay Act and Section 26B of the Kerala Act by which a first charge has been created in favour of the State over the property of the dealer or any person liable to pay the dues of sales tax, etc. Sub-Section (7) of Section 13 of the 2002 Act which envisages application of the money received by the secured creditor by adopting any of the measures specified under sub-Section(4) merely regulates distribution of money received by the secured creditor. It does not create a first charge in favour of the secured creditor, observed the Supreme Court.

The Supreme Court also observed that the non obstante clauses contained in Section 34(1) of the 1993 Act and Section 35 of the 2002 Act give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the 1993 Act or the 2002 Act, the provisions contained in those Acts cannot override other legislations. Section 38C of the Bombay Act and Section 26B of the Kerala Act also contain non obstante clauses and give statutory recognition to the priority of the State’s charge over other debts. These Sections and similar provisions contained in other State legislations not only create a first charge on the property of the dealer or any other person liable to pay sales tax, etc., but also give them overriding effect over other laws, held the Supreme Court.

The Supreme Court analysed the background of the above legislations and observed that while enacting the 1993 Act and the 2002 Act, the Parliament was aware of the law laid down by the Supreme Court, wherein priority of the State dues was recognised. If the Parliament intended to create a first charge in favour of banks, financial institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529A of the Companies Act, 1956 or Section 11(2) of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and ensured that dues of banks, financial institutions and other secured creditors should have priority over the State’s statutory first charge in the matter of recovery of the dues of sales tax, etc. In the absence of any specific provision to that effect, it is not possible to read any conflict or inconsistency or overlapping between the provisions of the 1993 Act and 2002 Act on the one hand and Section 38C of the Bombay Act and Section 26B of the Kerala Act on the other. And the non obstante clauses contained in Section 34(1) of the 1993 Act and Section 35 of the 2002 Act cannot be invoked for declaring that the first charge created under the State legislation will not operate qua or affect the proceedings initiated by banks, financial institutions and other secured creditors for recovery of their dues or enforcement of security interest, as the case may be.

The Supreme Court also held that the State legislations creating first charge in favour of the State operate in respect of charges that are in force on the date of introduction of the provisions creating the charge.

Observing as above, in elaborate judgment, the Supreme Court confirmed the orders of the High Courts and held that the provisions creating first charge for recovery of sales tax dues will prevail upon the charge in favour of banks under the DRT Act, 1993 and Securitisation Act, 2002.

Certificate of Entitlement – Stretching back effective date in assessment proceedings! appeals against assessment orders

Whirlpool India Ltd. S.A.1212 of 2003 dt.18.3.2009 (Larger Bench of M.S.T. Tribunal)

The issue before the Larger Bench was from reference judgment passed by the 2nd Bench in S.A.1212 of 2003 dt.31.3.2008. The appellant has filed this S.A. against assessment order for 1997-98. He was granted Certificate of Entitlement (COE) under PSI 1993, effective from 16.9.98. The date of commencement of commercial production was 1.3.98 and the appellant was praying to stretch back the effective date of COE in the assessment proceedings from 16.9.98 to 1.3.98. The Referring Bench noted judgments in case of Prav Electro (S. A. 575 of 96, dated11.1.2002) and Hikal Ltd., wherein it is held that the effective date can be stretched back in second appeal against assessment order also. The Referring Bench held a different view that the effective date cannot be stretched back in appeal against assessment order. Therefore, the matter was referred to the Larger Bench.

The Larger Bench, on hearing both the parties, observed that stretching back in appeal against assessment order is not permissible. The Hon’ble Larger Bench gave its verdict on different points raised by the appellant as under:

In the assessment proceedings, the Assessing Officer has authority to change the effect of COE and grant benefits of exemption by doing so.

The Assessing Officer in assessment proceedings u/ s.33 has no authority to change the effect of COE. The benefits of exemption u/ s.41 are dependent upon Entitlement Certificate (EC) & COE. The benefits could only be claimed by the appellant in respect of goods manufactured and sold during the eligibility period mentioned in E.C. and COE.

The 1993 PSI, provides unconditionally for grant of COE from the date of commencement of commercial production.

On close reading of the provisions contained in 1993 PSI, such a proposition cannot be advanced. The said Scheme does not provide for the same.

Other COE, being a certificate under 1993 PSI, is administrative in nature. The Assessing Officer has authority to change its effect in assessment proceedings. As such by the Tribunal too.

No doubt COE is a part of 1993 PSI. However, for regulatory aspect, it has been accommodated in Notification entry E-3, 136 u/s.41 of the Act. The authority to grant exemption to a specified class of sales is delegated by law to the Government u/ s.41 of the Act. Thus the COE and its regulatory aspect for grant of exemption to a specified class of sale in the Act is well absorbed in Notification entry E-3/136 u/s.41 of the Act. By law the Assessing Officer has to strictly follow Notification entry E-3/136 while consid-ering exemption to a specified class of sales. He has no authority to change the effect of COE in assessment proceedings and hence the Tribunal.

The Bombay High Court in Great Eastern case lays the law that ‘the sales tax liability accrues when event of sale takes place. It cannot be extinguished by subsequent certification with retrospective effect.’

Thus the proposition, canvassed by the appellant, does not get any support of law.

The benefits of exemption could be claimed unconditionally by the appellant on possessing of COE without looking into the eligibility period mentioned in COE.

The sales tax benefits become available to Eligible Unit (EU) on the basis of EC and COE and not on the basis of COE alone. They are available in respect of goods manufactured and sold during the eligibility period mentioned in EC and COE. All the Package Schemes viz.,1979, 1983, 1988 and 1993 of the Government adopt the benefits during the eligibility period given in EC and COE, the 1993 PSI does not adopt a different period or a different terminology.

A liberal interpretation be made of Notification entry E-3/136, u/s.41 of the Act for allowing the benefits of exemption to the appellant in assessment.

The ratio of the Supreme Court judgment in Wood Papers case, warrants strict construction of Notification entry E-3/136 u/s.41 of the Act. A plain reading of the Notification and plain construction of the Entry do not advance the case of the appellant. There is no contingency for full play to be given to the appellant for exemption and more particularly in assessment when the Assessing Officer has no authority.

The judgment of the Tribunal in the case of Prav Electro Spark Ltd. does advance the case of the appellant,

The Tribunal’s judgment in the above matter does not advance the correct proposition of law declared by the Apex Court in Jeypore case for the explained reason.

The effect of COE could be changed in the assessment proceedings by the Assessing Officer and benefits of exemption could be made available to the appellant.

The ratio of the Bombay High Court’s judgment in the case of Great Eastern Spinning & Weaving Mills demolishes this proposition, so also the Wood Papers judgment of the Apex Court. Such a proposition of the appellant also goes against the Notification E-3/136 u/s.d lof the Act.

Substantial justice be done to the appellant since he was pursuing alternate remedy for change of effect of COE by representing to the Commissioner and the Government.

The appellant did not agitate on the effect given to EC & COE at any point of time u/ s.55 of this – Act. The alternative remedy claimed by the appellant being administrative in nature, it has no sanctity of law and it is not a matter concerning the lawful remedy. In the present case we are in appeal against assessment (and no appeal is before us against COE). The powers which we possess u/ s.55 of this Act pertain to a limited aspect of what the Assessing Officer can do in assessment, we can do it in appeal, or what the Assessing Officer was supposed to do in assessment but not done, can be done by the Appellate Authority. This is the authority explained by the Bombay High Court in the case of M/ s.Amar Dye Chem, we are in possession . of. There exists no case for substantial justice when a matter pertains to strict construction and strict compliance of exemption conditions, as held by the Supreme Court, and when exemption is dependent on EC and COE and not COE alone.

The Tribunal has an authority to change the effect of EC & COE to date of commencement of commercial production certified by IA in assessment proceedings.

The appeal proceedings before the Tribunal are against the assessment. The Tribunal could deal with the grounds of appeal in the manner and authority the Assessing Officer remains in possession of. The ratio of the Apex Court judgment in Wood Papers (cited supra) warrants a strict interpretation of exemption notification. It does not allow the Tribunal to act otherwise. Any attempt of granting exemption by amending COE and EC in assessment shall amount to violation of the position of law declared by the Apex Court. It would be in breach of Notification so also result in subsuming the Notification to the appellant’s proposition. It is not a proposition of law.

Thus the Hon’ble Larger Bench held that the issue of stretching back the date of COE cannot be entertained in the appeal proceedings against the assessment order.

Nirav Shah

VAT Audit — Writ Petitions

VAT

Audit of Accounts

“It is a specialised job which can only be undertaken by the
person professionally competent and trained to audit.”

The Bombay High Court, by its order dated 28th March 2008,
disposed of the writ petitions filed by The Sales Tax Practitioners’ Association
of Maharashtra, The Bar Council of Maharashtra and Goa, The Bombay Small Scale
Industries Association, The Maharashtra State Tax Practitioners’ Associations
Federation, and others, challenging the constitutional validity of S. 61 of
Maharashtra Value Added Tax Act, 2002.

While rejecting all such petitions, the Honourable High Court
considered two major questions, which may be posed as follows :

1. Whether provisions regarding audit of accounts u/s.61(1)
of the MVAT Act, 2002 are constitutionally valid [particularly with reference
to Article 14, Article 19(1)(g) and Article 254 of the Constitution of
India] ? Held, Yes.

2. Whether advocates and sales tax practitioners can be
empowered to audit the accounts, u/s.61 of the MVAT Act, and give Report in
Form 704 ? Held, No.

The main contentions of the petitioners were :

For the last 56 years, advocates and sales tax practitioners have been enjoying an equal-level field in practice before the Sales Tax Authorities.

The impugned provision seeks to keep out a class of advocates and sales tax practitioners from their legitimate field of practice.

This class of practitioners and advocates have attained appreciable standard of expertise to understand and interpret the sales tax laws before the tax authorities under the Act.

The advocates also practice in the field of sales tax before the High Court and Supreme Court. Therefore, there is no reason to take away a vested right of such large class of practitioners in a bid to favour a particular class at the cost of rest of the categories.

U/s.82 of the Act, various categories of persons are entitled to practise, who are called sales tax practitioners. They comprise (1) Advocates, (2) Chartered Accountants (3) Other persons who hold qualification prescribed under the Act and (4) Government servants of the Sales Tax Department upon their leaving or retiring from the service in the sales tax department.

On account of the impugned legislation, this class of advocates and practitioners is being denied the rightful field of practice for certifying deductions and claims under the Act.

Perusal of S. 61 as also the reading of the prescribed form of audit would show that the audit is in fact a statutory return of the dealer for the purpose of enabling the Sales Tax Officer to complete assessment and therefore, involves minor skills, which can be better performed by the advocates.

As such, exclusion of advocates and sales tax practitioners from performing audit or carrying on audit is clearly discriminatory, arbitrary and unreasonable.

Several other States in the country have provided that the value added tax audit can be done not only by the C.A., but also by other professionals, including advocates.

Sales tax practitioners and also advocates have been guiding the trade in giving due information of the ever-changing sales tax laws, the implication of various claims and in filing the returns and appearing in assessment and if necessary in appeals.

There has been no grievance made against the easily accessible and expert services of this class.

The sales tax practitioners and advocates have been giving commendable services to the industries at all stages of sales tax proceedings.

Their valuable guidance and help is easily accessible at affordable charges.

By the amendment what is sought to be done is to have the assessment of tax liability under the Act assessed, approved and certified as the correct liability of a dealer by a third agency, who is described as class of persons called Chartered Accountants.

The work that the chartered accountant has to do is to verify the return with full details and certify the legality or otherwise of the claims in the returns. This function of assessment for the tax dues from a dealer under the MVAT Act has already been assigned and entrusted to the Commissioner or its delegates or officers appointed under the said Act.

The industries, therefore, would be obliged to engage services of chartered accountants over and above their respective appointee from the class of sales tax practitioners or advocates.

On account of this, heavy financial burden would be cast on small-scale industries and such burden is a serious impediment to the trade and would cut into the net profit of the respective industry.

This action of the State is unreasonable and cannot be done even under its exercise of ancillary legislation. The State Legislature under Entry 54 of the State List can enact law taxing sales. However, any ancillary legislation or procedure must have nexus to the object of the Act. The mandatory provisions of engaging services of CA are not based on any object of the Act, and as such, the provision is not within the legislative competence of respondent State as an ancillary provision.

The State Legislature by the impugned provisions has outsourced their statutory powers to assess the tax to a third party. Such delegation of powers is destructive of basic tenet of law and its enforcement.

The payment to be made to the chartered accountant is over and above the payment for the services of a sales tax practitioner who keeps the dealer well informed.

The audit charges to be paid to a CA are perceptively heavy. The industry will have to pay heavy burden by way of audit fees.

This additional compliance cost in terms of money and waste of time is an added impediment.

This additional payment is in pith and substance nothing but compulsory levy amounting to tax by the State. Such action offends Article 265 of the Constitution.

The impugned enactment is contrary to Article 19(1)(g) of the Constitution, since it prohibits the members of the petitioners from practising their profession and trade of their choice without there being any valid reason. [Since the petition raising this issue was by the Maharashtra Sales Tax Practitioner Associations’ Federation, and, not joined by any individual as petitioner, challenging vires of Article 19(1)(g), the BHC has not considered the maintainability of the petition].

The impugned S. 61 has resulted in divisive exelusion of advocates and sales tax practitioners, as the traders would not like to engage services of sales tax practitioners or advocates for certification.

The result is that a large section of Practitioners in mofusil area and small towns will be rendered out of practice and consequently adversely affecting their livelihood.

The requirement of CA alone for the certification in form 704 is wholly irrelevant and arbitrary.

No purpose is served by CA’s certification of correctness under the garb of audit of books of accounts.

S. 82 of the MVAT Act provides which categories of persons are entitled to practise under the said Act. Explanation to S. 61 carves out a separate class which does not serve the object of S.61.

It causes equals to be treated unequally. This violates the equality right under Article 14.

As there is no reasonable basis for the exclusion, the provision is arbitrary being violative of Article 14.

The petitioners placed reliance in the judgments of Omprakash Sud and Ors. v. State of J. & K. and Ors., 1981 (2) SCC 270, Suneel Jetley and Ors. v. State of Haryana, 1984(4) SCC 296, Deepak Sibal v. Punjab University & Ors., 1989(2) SCC 145, Ahmedabad Municipal Corpn. and Anr. v. Nilaybhai R. Thakore and Anr., 1999 (8) SCC 139 and in D. S. Nakara and Ors. v. Union of India, 1983 1 S.CC 305.

The petitioners also argued that S. 22 of the MVAT Act provides for audit (by the Department). S. 22(1)(a) to (e) contemplates all situations which require audit. This audit is carried out by the Officers empowered by the Commissioner or to whom powers have been delegated. S. 22 therefore, covers all situations which require audit. This situation arises after the returns are filed. There is no indication of any requirement of audit before filing of returns, and as such, S. 61 is directly in conflict with S. 22 and is ultra vires the scope of S. 22. S. 22(3) permits the audit to be conducted by an officer who may not be a chartered accountant. If S. 22 audit can be conducted by an officer who may not be a chartered accountant, then there is no reason why S. 61 audit cannot also be conducted by a person who is not a chartered accountant. S. 61 which requires audit only by a chartered accountant, therefore, is discriminatory. Reliance is placed on Municipal Corporation of Grater Bombay and Ors. v. Thukral Anjali Deokumar and Ors., (1989) 2 S.CC 249.

Before proceeding further, the Honourable High Court first made a reference to S. 61 of the MVAT Act and the amendments made thereto. The Court also referred to S. 82 of the MVAT Act and observed “S. 82 of the Act permits sales tax practitioners and others set out therein, the right of appearance before any – authority in proceedings under the Act. The right of appearance, therefore, has not been taken away. The right to appear subsists. The limited question is whether u/s.61, the exercise of getting the accounts audited, can be said to be part of the right to appear and plead before the Courts or judicial forums and or getting the accounts audited is part of the right conferred by S. 82 or in the alternative excluding other than chartered accountants and cost accountants is arbitrary or violative of the rights of these excluded categories to carryon their trade or profession. “

The Court also referred to the dictionary meaning of the expression ‘audit’ and ‘auditor’ as given in P. Ramanatha Aiyar’s Advanced Law Lexicon, 3rd Edition, Oxford English Dictionary and Mr. R. A. Irish’s book ‘Practical Auditing’. It also referred to the discussion on the subject in President, Councillors and Ratepayers of the Shire of Frankston and Hastings v. Cohen, 102 C.L.R. 607 the High Court of Australia.

Responses were invited from the respondents i.e., (1)the Government of Maharashtra and (2) the Institute of Chartered Accountants of India.

In its detailed reply, the Government of Maharashtra, through its Dy. Commissioner of Sales Tax submitted as follows:

“The Government of Maharashtra decided to introduce VAT system with effect from 1st April, 2005. At that time the Government decided to amend the VAT Act, 2002 in terms of the national consensus arrived at by the Empowered Committee of State

Finance Ministers. Accordingly, a draft bill was prepared for submission to the Government and it was made open for comments of the public. The amendment bill inter alia included a proposal on the request of advocates, tax practitioners and cost accountants to include them u/s.61 for tax audit along with the chartered accountants having stand-ing in profession for a period of 7 years or more. But there was no assurance directly or impliedly that such proposal will be accepted by the Govern-ment or enacted by the Legislature. Various aspects were considered including that under the Companies Act. S. 211(C) of the Companies Act requires that all companies in India must prepare their annual accounts in accordance with the Accounting Standards and get those accounts audited in accordance with the Auditing Standards laid down by the Institute of Chartered Accountants of India. The Government decided to continue the old provision of audit under MVAT i.e., audit u/s.61 only by chartered accountants.

Under the Companies Act, the Central Government has also constituted a National Advisory Committee on Accounting Standards (NACAS), which is required to recommend the Accounting and Auditing Standards. However, the Central Government did not issue any notification based on the recommendations of NACAS. The Accounting and Auditing Standards issued by the Institute of Chartered Accountants of India are binding. Thus, no corporate entity can prepare its accounts by an method other than that provided by ICAL Similarly, no audit can be conducted without following Auditing and Assurance Standards (AAS) issued by ICAL

The Accounting and Auditing Standards issued by the Institute of Chartered Accountants of India are based upon the Accounting and Auditing Standards issued by the International Federation of Accountants (IFAC). Accounting Standards Board of IFAC in the year 2002-2003 stands converted into independent Accounting Standards Board (ISAB). The Board to start with, Adopted Accounting Standards (AAS) issued by IFAC and now is in the process of revision of some of these Standards. The AS are very complex and there are major variances in respect of turnover of sales and purchases accounted as per AAS in the profit and loss account of the enterprise and turnover of sales and purchases which is required to be considered for the purpose of levy of tax under the Maharashtra Value Added Tax Act, 2002. Clear-cut comments on the major changes made by any firm in a given period in respect of accounting system, method of valuation of stocks and business model, etc. are required from the auditor.

These are complex accounting and audit issues which advocates, sales tax practitioners and company secretaries are not professionally qualified to handle.

S. 29 of the Advocates Act, 1961 provides that advocates would be the only class of persons to ‘practise the profession of law’. S. 33 of the Advocates Act bars any other professional to practise in any Court or before any authority, etc. S. 49 of the Advocates Act gives general powers to the Bar Council of India to make such rules. Under this power, the Bar Council of India has framed the rules, which prohibit an advocate from engaging in any other profession other than practicsing the profession of law. The requirement of S. 61 of the MVAT Act is of auditing of the books of accounts and giving a certificate of his conclusion after verification. This cannot be called as ‘practise the profession of law’.

The area u/s.61 is practising in the field of accountancy and auditing, which an advocate is not competent to undertake under the Rules framed by the Bar Council of India u/s.49 of the Advocates Act, 1961.

Parliament of the country has framed the Chartered Accountants Act, 1949. U/s.2(2) the area in which a member of the Institute of Chartered Accounts of India (ICAI) can practise is defined. The practice of accountancy and auditing can be carried out by the chartered accountants who are members of ICAI and are holding a certificate of practice.

If the advocates embark on practice in the area of accountancy and auditing work, then it would amount to practice in accounting and auditing and thus will violate the provisions of the Advocates Act, 1961 and the rules framed thereunder by the Bar Council of India. Therefore, the advocates cannot be allowed to carry out the function of an accountant or of an auditor.

As regards sales tax practitioners, they are not governed by any professional Act. Any graduate having acquired a Diploma in Taxation or having passed specified accountancy examination and acquired such qualifications as are prescribed by the Central Board of Revenue or having retired as an officer from the Sales Tax Department, can enrol with the Sales Tax Department as a sales tax practitioner. He is not required to be a qualified auditor, nor is he governed by the strict discipline and acceptability required under the Chartered Accountants Act, 1949 for any acts of omission and commission in the conduct of audit. Hence, a sales tax practitioner cannot be expected to provide the level of assurance and creditability of the audit of the accounts of a VAT payer expected by the Revenue. Hence, while a sales tax practitioner is qualified to appear in proceedings, he cannot conduct audit u/s.61.

All over India, as per information available, 30 States and Union Territories have introduced VAT, either in the year 2005-2006 or in the year 2006-2007. Information about audit provision in two States i.e., Nagaland and Mizoram is not available. Out of the remaining 28 States, four States (Haryana, Himachal Pradesh, Sikkim, West Bengal) have no provision for audit from independent professionals. Thirteen States and Union Territories have called for an Audit Report under the VAT Act exclusively from chartered accountants. These States are (i) Auranachal Pradesh, (ii) Bihar, (iii) Chattisgarh, (iv) Goa, (v) Madhya Pradesh, (vi) Maharashtra, (vii) Manipur, (viii) Meghalaya, (ix) Punjab, (x) Rajasthan, (xi) Dadra and Nagar Haveli, (xii) Daman and Diu, (xii) Chandigarh.

Another 7 States have called for Audit Report only from professionals who have knowledge in the field of accountancy i.e., chartered accountants or cost accountants. In those States the sales tax practitioners or advocates are not authorised to give the Audit Report, though they are allowed to represent. before the authorities. These States are (i) Assam, (ii) Delhi, (iii) Kerala, (iv) Orissa, (v) Tripura, (vi) Jammu and Kashmir, (vii) Uttranchal.

Only four States have allowed other professionals besides chartered accountants and cost accountants to conduct this audit. These States are (i) Andhra Pradesh, (Ii) Gujarat, (iii) Jharkhand and (iv) Karnataka.

The C.A.s were included after consideration and analysis of the facts as to their expertise and specialised training. The VAT is designed for the purpose of self- assessment by certifying returns by the C.As. The VAT is invoice-based system and the deductions are based on certification. A true and correct invoice of having paid Value Added Tax, in the treasury is required. It is therefore, necessary ingredient of certification of data contained in returns and encompasses entire sphere of verification of account books and vouchers. It is submitted that the experience of the income tax department shows that independent tax audit has improved the proper maintenance of books of accounts from the taxation point of view. The Empowered Committee had referred the issue to the Group of Commissioners of Sales Tax to decide the necessary provisions for audit. It was recommended by the said committee that the audit of certification of the books of accounts should be by specified authority only.”

The Institute of Chartered Accountants of India in its reply, submitted that VAT is an invoice-based system, where the major thrust is on self-assessment of the tax liability by the dealer. It is necessary therefore to respect book-keeping requirements and also necessary to ensure that the particulars furnished by the dealer are true and correct. Consequently, in the interest of the State, the Legislature has found it necessary to have the accounts audited.

The audit is a specialised subject and the same is required to be carried out after detailed verification of the books of accounts applying the accounting and auditing principles. Audit of accounts requires expertise. The chartered accountants being experts in the field of accounting and auditing, the said Act rightly provides that the accounts be audited only by chartered accountants.

To consider the challenges under Articles 14 and 19(1)(g), the Hon’ble Court referred to S. 44AB of the Income-tax Act, which contains a similar provision for audit of accounts of persons whose total sales or turnover or gross receipts exceeds the pre-scribed limits. This provision, when introduced for the first time, was challenged before various High Courts. And the Supreme Court in an appeal before it, has upheld the legality of the Section. [T. D. Venkata Rao (SC) (AIR 1999 sC 2242)]

In the case of R. Sathya Moorthy and Ors. v. Union of India and Ors., (1991) 189 ITR 491, the petitioner challenged the validity of S. 44AB of the Income-tax Act, before the Madras High Court. The challenge made was on behalf of Income-tax practitioners as also an assessee, to contend that u/s.44AB, as compulsory audit was restricted to chartered accountants, it violates both, Articles 14 and 19 of the Constitution.

The petition was dismissed and an appeal was filed before the Supreme Court. While dismissing the appeal, the Supreme Court held as under:

“The chartered accountants by reasons of their training having special aptitude in the matters of audits. It is reasonable that they, who form a class by themselves, should be required to audit the accounts of businesses whose income exceeds RsAO lakhs and professionals whose income ex-ceeds Rs.10 lakhs in any given year. There is no material on record, and indeed, in our view, there cannot be, that an income tax practitioner has the same expertise as chartered accountants in the matter of accounts. For the same reasons, the challenge under Article 19 must fail, and it must be pointed out that these income tax practitioners are still entitled to be authorised representatives of assessees.”

In view of above, the Justice F. I. Rebello & R. S. Mohite of the Bombay High Court opined that once the Supreme Court has upheld the legality of S. 44AB of the Income-tax Act, where the same terminology was used and which ‘was also a provision pertaining to audit, in our opinion, and considering the object of both the provisions, which is prevention of evasion of tax dues, the challenge by the petitioners on the ground of infraction of Article 14 and 19 will have to be similarly rejected. There are practically no distinguishing features. The only distinction, if any, is that, whereas S. 44AB is for the purpose of ascertaining ‘total income’, S. 61 is for certification whether VAT had been correctly assessed, collected and paid.

The various submissions now made under Articles 14 and 19 in the challenge to S. 61 were also advanced whilst challenging S. 44AB of the Income-tax Act before the various High Courts. The Madras High Court had referred to judgments of various other High Courts which had decided the challenge to S. 44AB. The judgments of the High Courts are Mohan Trading Co. v. Union of India, 196 ITR 134 (MP). Rajkot Engineering Association v. Union of India, 164 ITR 148 (Raj), A. S. Sharma v. Union of India, (1985) 175 ITR 254 (A.P.) and T. S. Natraj v. Union of India, (1981) 155 ITR 81 (Kar.).

After noting various points from the above-referred judgments, the Court rejected the challenge based on Article 14 on the following grounds:

(i) Chartered accountants by reason of their training have special aptitude in the matter of audit. An income tax practitioner does not have the same expertise as the chartered accountants in the- matter of accounts. The argument therefore, that the effect of such a provision will be to exclude all other categories of authorised representatives except the chartered accountants from carrying on their profession is liable to be rejected, as they constitute two distinct classes having a nexus with the object of the provisions, which is evasion of tax dues.

(ii)The contention that such a provision brings in an oppressive restriction is also liable to be rejected as auditing accounts is a specialised job. It may be true that some income tax practitioners may also ac-quire that skill by sheer practice without passing the necessary examination. But that does not preclude Parliament from prescribing special qualifications with reference to the auditing of accounts.

(iii) Legal practitioners and chartered accountants are equal for the purpose of representation of assesses before the Assessing Authority, but they are not equals for the purpose of compulsory audit. The preferential treatment given to the chartered accountants for the purpose of compulsory audit does not militate against the rule of equality under Article 14 of the Constitution. The terms ‘audit’, ‘auditing’ and the ‘functions of auditor’ clearly bring about the difference between the chartered accountants and others.

The object and purpose in providing compulsory audit is to facilitate the prevention of evasion of taxes, administrative convenience in quick and proper completion of assessments, etc. In the light of this object, chartered accountants and others cannot be said to be similarly situate. The qualifications and eligibility to be enrolled as income tax practitioners are entirely different from that of chartered accountants from the point of view of auditing.

(iv) Merely because apart from dealers whose turnover is more than 40 lacs, dealers dealing in liquor trade have also to get their accounts audited does not make the provision arbitrary. Such dealers are a class by themselves as they are carrying on a trade which is res extra commercium. They constitute a class by themselves and if the Legislature in its wisdom has provided that their accounts should be audited, it is neither unreasonable, nor treating them as a class arbitrary. The classification in the instant case is reasonable and has a nexus with the object which is to direct a class of dealers getting their accounts audited by a specialised agency,…so that there is no tax evasion.

On behalf of the petitioners, a distinction was sought to be made in certification under the Income-tax Act and under the VAT Act. In our opinion, the legality of the provisions or its non-arbitrariness is not dependent on the manner in which the form has to be filled, the contents thereof and the procedure. What is relevant is to consider the object of the Act and in selecting the class of professionals whether the Legislature has acted unreasonably or has imposed unreasonable restrictions on the right of the assessee and or income tax practitioners to carryon their occupation or profession. It must be noted that the chartered accoun-tants cannot certify the correctness and completeness of the sales tax returns, unless they audit the accounts of the dealer as maintained in the first part of S. 61. After audit, chartered accountant has to certify the various items in Part I of Form No. 704. These items are subject to audited observations of the chartered accountant and comments about the non-compliance, shortcomings, deficiencies, in the return filed by the dealer. There are various other requirements.

“Suffice it to say that it is a specialised job which can only be undertaken by the person professionally competent and trained to audit. Advocates are not qualified as observed by the Supreme Court in T. D. Venkatarao v. Union of India, 237 ITR 315. The other sales tax practitioner and retired employees definitely not.”

The settled law on the subject is that as 10Ifgas the twin tests of reasonableness of the classification and nexus with the object are satisfied, wisdom of legislation cannot be substituted. The State Legislature is free to decide in its wisdom as to how best to safeguard the State revenue. Different States may adopt different standards and policy of one Legislature may not be adopted by another Legislature, as the matter lies in the domain of policy making. Because some States have permitted sales tax practitioners to carryon audit need not necessarily mean that as the Legislature of the State of Maharashtra has not so provided, that would be arbitrary or that the classification considering the nexus of the object is arbitrary. It is for the State Legislature to decide how to protect its revenue and this is more true with regard to economic legislation. See R. K. Garg v. Union of India and Ors., 1982 Vol. 133 ITR 239 SC as also the observations of the Supreme Court in Para 16 in Directorate of Film Festivals and Ors. v. Gaurav Ashwin Jain and Ors., (2007) 4 Supreme Court Cases 737 wherein the

Court observed as under:
“16 …. Courts cannot interfere with policy, either on the ground that it is erroneous or on the ground that a better, fairer or wiser alternative is available. Legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review …. “

Rejecting the challenge under Article 19(1)(g), the Court after referring to the Supreme Court’s decisions in V. Sasidharan v. Peter and Karunakar, 1984 (4) SCC 230, State of Gujarat v. Mirzapur Moti Kureshi Kassab Jamat and Ors., (2005) 8 SCC 534 and Fertiliser Corporation Kamgar Union v. Union of India, AIR 1981 SC 344, observed: “in the instant case considering S. 82 of the VAT Act, the category of persons who are excluded from the ambit of explanation of S. 61 are not denied their right of appearance before the authorities under the Act. In other words, they are not prohibited from carrying on their profession.”

The High Court further said that there is a difference between prohibition and restriction. Article 19(6) of the Constitution empowers the State to put reasonable restrictions in public interest. Apart from the power conferred on the State to impose reasonable restrictions under Article 19(6), there is a further power conferred under Article 19(6) of laying down professional or technical qualifications necessary for practising the profession as in the instant case.

Considering the tests laid down in MRF Ltd. v. Inspector, Kerala Government and Ors., 1998 (8) SCC 227 to judge the reasonableness of the restriction, can the provision which requires the audit to be done only by an accountant as explained, amount to an unreasonable restriction? In the matter of carrying out audit the State has chosen to confer that right only on a class of persons having expertise in the field. This cannot be said to be arbitrary or excessive in nature, so as to go beyond the requirement of the interest of the general public. That would be yet another reason as to why the challenge under Article 19(1)(g) must fail.

Rejecting the challenge to the Constitutional validity of the Legislation under Articles 14 and 19 at the instance of the Bar Council of Maharashtra and Goa, The Court said :

“We may only point out that S. 29 of the Advocates Act till date has not been brought into force. Apart from that, one fails to understand the stand of the Bar Council after the decision of the Supreme Court in T. D. Venkatrao (supra) where the Supreme Court has accepted the fact that chartered accountants by the reason of their training have special aptitude in the matter of audit. The act of maintaining accounts is neither pleading, practice, nor acting.”

From the conclusion drawn by the Supreme Court and various High Courts and considering the contentions advanced, various challenge made by the petitioners including the challenge based on Articles 14 and 19, etc., the views expressed by the Hon’ble Bombay High Court, in the above decision, may be summarised as follows:

Chartered accountants by their training have special aptitude in the matter of audit.

Argument that it is oppressive restriction is re-jected as auditing accounts is a specialised job.

Legal practitioners and chartered accountants are equal for the purpose of representation of asses sees, but they are not equals for the purpose of audit.

Audit is a specialised job, which can be under-taken by a person professionally competent and trained to audit. Advocates and sales tax practitioners are not qualified.

Difference States may adopt different standards and policy.

Provisions u/s.61 have nothing to do.with provisions u/ s.22 of the MVAT Act. S. 22 is a special power conferred to the Commissioner.

The State has chosen to confer the right of auditing u/ s.61 only to CAs having expertise in the field. Therefore, challenge u/s.19(1)(g) must fail.

Following SC judgment in the case of L. M. Mahurkar v. Bar Council of Maharashtra, (1996) 101 STC 541 & T. D. Venkatrao (supra), challenge to the constitutional validity of the legislation under Articles 14 & 19 at the instance of the Bar Council is rejected.

Audit of accounts by a chartered accountant does not amount to outsourcing the statutory power of the Government. It neither amounts to abdication, nor excessive delegation.

Such an exercise does not amount to conferring on the accountant a power to determine the correct tax liability of the dealer.

A certificate by CA is to enable the department to consider that the person having knowledge of audit and subject to the disciplinary control of its parent body has certified that the accounts are properly maintained.

This is to aid the officers in discharging their statutory duties.

The audit of accounts is to be conducted only in respect of certain specified class of dealers. The amount of fee which has to be paid is the amount to be decided between the dealer and that person whom he selects from amongst the accountants that are available. It cannot be said to amount to compulsory levy amounting to tax. Thus, challenging under Article 265 also fail.

The enactment is pursuant to the power of the State Legislature to make law within its competence. This does not attract Article 301.

The Bombay High Court thus held:

“In our opinion, there is no merit in any of the petitions and consequently rule discharged in all the petitions. In the circumstances of the case, each party to bear their own costs.”

Nirav Shah

Methods of discharging tax liability on works contract under MVAT Act, 2002

VAT

Works Contracts are in the nature of composite contracts. The
entire value of a works contract cannot be made liable to tax under the sales
tax (VAT) laws. The Supreme Court, in the case of Builders’ Association of
India v. Union of India, (73 STC 370) (SC), held that taxable quantum in a
works contract is the value of goods (in which transfer of property takes place
in execution of works contract). It is, therefore, necessary to find out the
value of the goods from the total contract value. The contractor can find out
the same by taking various deductions towards labour charges, etc. However,
sometimes it may be difficult to decide the deductions. Therefore, there are
schemes for standard deduction. There are also alternative composition schemes.
A brief discussion about various methods of discharging liability on works
contract under the Maharashtra Value Added Tax Act, 2002 may be as under.

(i) If in the contract itself the value of the goods and
labour is shown separately, then such values of goods will be taxable at
appropriate rates. In this respect reference can be made to the judgment in the
case of Imagic Creative P. Ltd. (12 VST 371) (SC), where such division is
upheld by the Supreme Court.

However, if the values are not separately specified but only
one aggregate value is mentioned, then the contractor can discharge tax
liability by any of the modes discussed hereunder.

(ii) As per Statutory Provisions :

Under this system tax payable on the value of goods can be
arrived at by adopting Rule 58 of the MVAT Rules, 2005, which reads as under :

“58. (1) The value of the goods at the time of the transfer
of property — in the goods (whether as goods or in some other form) involved in
the execution of a works contract may be determined by effecting the following
deductions from the value of the entire contract, insofar as the amounts
relating to the deduction pertain to the said works contract :

(a) labour and service charges for execution of the
works;

(b) amounts paid by way of price for sub-contract, if
any, to sub-contractors;

(d) charges for obtaining on hire or otherwise, machinery
and tools for execution of the works contract;

(e) cost of consumables such as water, electricity, fuel
used in execution of works contract, the property in which is not
transferred in the course of execution of the works contract;

(f) cost of establishment of the contractor to the extent
to which it is relatable to supply of the said labour and services;

(g) other similar expenses relatable to the said supply
of labour and services, where the labour and services are subsequent to the
said transfer of property;

(h) profit earned by the contractor to the extent it is
relatable to the supply of said labour and services : . . . . . .”

In the alternative, i.e., if dealer cannot ascertain the
labour portion on its own as per the above, the dealer can adopt the standard
deduction given in Table in Rule 58(1). The said Table is reproduced on the next
page.

(2) The value of the goods so arrived at under sub-rule(1)
shall, for the purposes of levy of tax, be the sale price or, as the case may
be, the purchase price relating to the transfer of property in goods (whether as
goods or in some other form) involved in the execution of a works
contract.”

Table: Deduction from contract price towards labour charges

Table:
Deduction from contract price towards labour charges

Sr.

Type of works contract

*Amount
to be deducted
from the contract
price

(expressed as a
percentage of the contract price)

(1)

(2)

(3)

Installation of plant and machinery

15%

Installation of air conditioners and air
coolers

10%

Installation of elevators (lifts) and
escalators

15%

Fixing of marble slabs, polished granite
stones and

25%

tiles (other than
mosaic tiles)

Civil works like construction of buildings,

30%

bridges, roads, etc.

Construction of railway coaches on under
carriages

30%

supplied by Railways

Ship and boat-building including
construction of barges,

20%

ferries, tugs,
trawlers and dragger

Fixing of sanitary fittings for plumbing,
drainage and

15%

the like

Painting and polishing

20%

Laying of pipes

20%

Tyre re-treading

40%

Dyeing and printing of textiles

40%

Annual maintenance contracts

40%

Any other works contract

25%

It can be seen, from the above, that as per Rule 58(1) — main provision, the contractor can determine his own labour portion and take deduction of the same from gross contract value. The balance will be liable to tax. The said taxable portion is to be divided between 0%, 4%/5% and 12.5% goods and tax payable shall be worked out accordingly.

   iii) In the alternative, i.e., if the contractor cannot ascertain the labour portion on his own, he can adopt the standard deduction given in the Table. The remaining portion, after applying deduction, will be liable to tax at applicable rates i.e., 0%, 4%/5% and 12.5%, as the case may be.

It may also be mentioned here that if one follows any of the above methods, he can avail the full set-off on goods purchased under VAT from local RD, subject to other conditions of set-off.

Composition Schemes:
   iv) In the alternative, contractor can pay tax by the Composition Scheme and in that case, he will be required to pay tax on full contract value 8%. No deduction of labour charges, etc., will be available. If one pays tax as per the above composition scheme, he will be entitled to set-off 64% of the normal set-off otherwise available. The reduction will apply to the goods which get transferred and not to other goods. In other words, for those goods (other goods) full set-off will be available.

   v) One more method of composition is available i.e., in case of Notified Construction Contracts. The list of notified construction contract (as per Notification issued by the Finance Department of Maharashtra on 30th November 2006) is as under:

NOTIFICATION

The Maharashtra Value Added Tax Act, 2002.

“No VAT.1506/CR-134/Taxation-1 — In exercise of the powers conferred by clause (i) of the Explanation to sub-section (3) of section 42 of the Maharashtra Value Added Tax Act, 2002 (Mah. IX of 2005), the Government of Maharashtra hereby notifies the following works contracts to be the ‘Construction Contracts’ for the purposes of the said sub-section, namely:

   A) Contracts for construction of:
   1. Buildings,

   2. Roads,

   3. Runways,

   4. Bridges, Railway overbridges,

   5. Dams,

   6. Tunnels,

   7. Canals,

   8. Barrages,

   9. Diversions,

   10. Rail tracks,

   11. Causeways, subways, spillways,

   12. Water supply schemes,

   13. Sewerage works,

   14.Drainage,

   15. Swimming pools,

   16. Water purification plants, and

   17. Jettys

   B) Any works contract incidental or ancillary to the contracts mentioned in paragraph (A) above, if such work contracts are awarded and executed before the completion of the said contracts.”

If a contract is covered by the above list, then the dealer (contractor) can discharge liability by paying 5% on total contract value. If the dealer pays by this composition scheme, then set-off on purchases will be granted after reduction @ 4% of purchase price of goods.

   vi) 1% Composition Scheme:
This scheme is prescribed by section 42(3A) for builders and developers who, along with construction, transfer immovable property like land. The Notification prescribing the scheme is issued on 9-7-2010. The Notification contains various conditions. (Desiring dealer should go through the same for further information.)

The dealer (contractor) may adopt any of the above modes as may be suitable in its case, and, contractwise choice can also be made. The choice of method will depend upon factual position of each case. One can adopt the method which works out for minimum tax liability.

Nirav Shah

Search & Seizure under mvat Act, 2002

VAT

1. Introduction

The powers of inspection, search and seizure are necessary
for the purpose of effective administration of taxation laws, like Sales Tax. It
is, therefore, valid as per the Constitution also, subject to reasonable limits.

In Maharashtra, the Bombay Sales Tax Act, 1959 (BST Act) was
in operation till 31st March 2005. The Maharashtra Value Added Tax Act, 2002 (MVAT
Act) has come into operation from 1st April 2005.

Under the BST Act, section 49 was providing for necessary
powers of search and seizure. Similar powers have been provided through section
64 of the MVAT Act. The provisions of both the Acts are almost the same.
Therefore, the precedents and circulars issued in relation to the BST Act will
also remain applicable in that relation to the MVAT Act. At present, there are a
number of search operations. Therefore, the provisions of Search and Seizure are
briefly discussed herein.

2. Section 64 of the
Maharashtra Value Added Tax Act, 2002

2.1
Section 64 of the MVAT Act reads as under:

“64. Production and inspection of accounts and documents and
search of premises.

(1) The Commissioner may, subject to such conditions as may
be prescribed, require any dealer to produce before him any accounts or
documents, or to furnish any information, relating to stocks of goods of, or to
sales, purchase and delivery of goods or to payments made or received towards
sales or purchase of goods by the dealer, or any other information relating to
his business, as may be necessary for the purposes of this Act.

(2) All accounts, registers and documents relating to stock
of goods of, or to purchases, sales and delivery of goods, payments made or
received towards sale or purchase of goods by any dealer and all goods and cash
kept in any place of business of any dealer, shall at all reasonable times, be
open to inspection by the Commissioner, and the Commissioner may take or cause
to be taken such copies or extracts of the said accounts, registers or documents
and such inventory of the goods and cash found as appear to him to be necessary
for the purposes of this Act.

(3) If the Commissioner has reason to believe that any dealer
has evaded or is attempting to evade the payment of any tax due from him, he
may, for reasons to be recorded in writing, seize such accounts, registers or
documents of the dealer as may be necessary, and grant a receipt for the same,
and shall retain the same for so long as may be necessary in connection with any
proceedings under this Act or for any prosecution:

Provided that, on application of the dealer, the Commissioner
shall provide true copies of the said accounts, registers or documents.

(4) For the purposes of sub-section (2) or
sub-section (3), the Commissioner may enter and search any place of business of
any dealer or any other place where the Commissioner has reason to believe that
the dealer keeps or is for the time being keeping any accounts, registers or
documents of his business or stocks of goods relating to his business.

(5) Where any books of accounts, other documents, money or
goods are found in the possession or control of any person in the course of any
search, it shall be presumed unless the contrary is proved, that such books of
accounts, other documents, money or goods belong to such person.

Explanation: For the purposes of this section, place of
business includes a place where the dealer is engaged in business, through an
agent by whatever name called or otherwise, the place of business of such an
agent, a warehouse, godown or other place where the dealer or the agent stores
his goods and any place where the dealer or the agent keeps the books of
accounts.”

2.2. As per section 64(1), the Commissioner (which also
includes his deputy if so authorized) can call for any information or ask to
produce before him any accounts or documents relating to stock of goods or
sales/purchases, deliveries or any other information relating to the business as
may be necessary for the purpose of the Act. Thus above information, etc. can be
called in any proceedings. Since other information can also be called, even
ledger, cash/bank book, though not specifically mentioned, can be asked for
under the above provision. As per Rule 70 of MVAT Rules, 2005, notice for above
purpose shall be in Form 603.

2.3. As per section 64(2), the Commissioner can take
inspection of the above mentioned accounts or documents kept at any place of
business of dealer at any reasonable time and also take extracts/copies of the
same.

2.4. As per section 64(3), the Commissioner, if he has reason
to believe that the dealer is attempting to evade payment of any tax due from
him, he can seize the above mentioned accounts/documents, etc. He shall grant
receipt for the same. The said accounts can be retained so long they are
necessary in connection with any proceedings under this Act or for a
prosecution.

2.5. As per Rule 69, such seized books cannot be retained for
more then 21 days without recording reasons. However, if any longer retention is
required, and, if the authority seizing the books is below the rank of Jt. Comm.
of Sales Tax, then he can retain the same for a longer period by obtaining
permission from the higher authority. The Joint Commissioner can give permission
only up to one year, at a time, and it should be given after recording reasons
for the same. The time limit can be further extended, but only one year at a
time. However if the seizure is by a Joint Commissioner or any higher authority,
then no such permission is required.

2.6. If any accounts, documents, stocks or money is found at
any such place where visit is given then they shall be deemed to belong to the
person in whose possession they are found, unless the
contrary is proved. [Section 64(5)]. This is with a view to safeguard interest
of Revenue and to see that the dealer does not come out with false excuses.

2.7. By explanation to section 64(5), a Special meaning is
given to the ‘place of business’. Thus the authorities have very wide coverage.

2.8. Reference can be made to the judgment in case of Bhowal
Traders & Others (131 STC 145), wherein Gauhati High Court has held that when
there is no prohibition under the Act for searching the residential premises,
there can be valid search of residential premises also, if there is reason to
believe that the documents are lying there. From the above provisions in section
64(5), it appears that the authorities can search residential premises under the
MVAT Act, provided that other
conditions are fulfilled.

3. It is expected that a search will be conducted only after having reasonable bonafide belief. (Har Kishandas Gulabdas & Sons – 27 STC 434). Reason for belief should be recorded before hand. (Hari-harajan Singh 98 STC 208 and Tapcon Int. (I) Pvt. Ltd. 104 STC 433).

‘Reason to believe’ means that the belief must be of a reasonable nature and as a prudent man. It must be based on some relevant material and not based on suspicions, gossip or rumours [Lit light Co. 43 STC 449 and Shree Nath Singh 82 ITR 147, Bhagwan Ind. Ltd. 31 STC 293, Lakhamani Mewal Das 103 ITR 437 (SC) and Laxman Das Saraf 103 STC 385].

At all Reasonable Times means that it is normally not allowable for an hour or a day that is not a working hour or a working day respectively, even though the place of business is found open. (Mariyala Venkateswara Rao 2 STC 167). No entry is possible at odd or unearthly hours. (Deoralia Bros. 50 STC 113).

Under the present provisions under the MVAT Act, there are no powers to seize goods or to ask for making advance payment of tax. The Enforcement authority (i.e. visiting officer), after inspect-ing books, etc., shall assess the dealer on the basis of materials found. As per section 23(5) of MVAT Act, such assessment can be qua transaction also. After passing such order, the tax may become due which then can be recovered as per provisions of law. The dealer can also prefer appeal, if aggrieved. However, practically, dealers are forced to make an advance payment.

Under the present MVAT Act, it is noticed that there are more issues about Input Tax Credit. The department, on the ground, that vendor of the purchaser has not paid taxes, claims the said amount from the purchaser. In fact, such ITC can be reduced only by passing the necessary statutory order. However the department tries to get the ITC difference paid without passing such order and insists upon revi-sion of returns by the dealers themselves. Legally, it appears to be an unjustified action, which the dealer can resist as per the law. The practice is neither justified nor according to the law.

Documents seized as a result of illegal seizure.

Though search is found illegal, as per the view held by various High Courts, the materials can be used as evidence. [M.K. Annamalai Chetiar & Co. (16 STC 687) Purshottam Rangta 79 STC 39, Poornmal (93 ITR 505) and Kusanlata Singh (185 ITR 56(SC)]. However, it is worth noting that in cases where courts are satisfied about wrongful seizure action, heavy costs can be levied by the court on the De-partment. Reference can be made to judgment in case of Director General of I.T. v. Diamond Stone Export Ltd. & Others (291 ITR 438)(SC).

8. Procedure of Search and Seizure

No procedure for search action is provided in the Act itself. This will be governed by other normal provisions. Enforcement Authorities normally take a statement of the person searched. The person can reply to the extent possible. If he subsequently finds that the statement given by him was not correct or was under duress, he can retract the same. The retraction should be as early as possible. It is also held that admission in the statement is not conclusive. The retracted statement is to be read together to evaluate weight of admission for appreciating evidence. Also admission should be of concerned dealer/person and not of any other person on his behalf. Reference in this respect can be made to the judgment in case of C.I.T. v. Ashok Kumar Soni (291 ITR 172)(Raj).

The Commissioner of Sales Tax has issued a Trade Circular bearing No.1T of 1995 dated 21.1.95, explaining the rights and duties of the dealer visited by the Enforcement Officer. The said circular will be useful under the MVAT Act also.

“Mini Enforcement”

Under the MVAT Act, there is one more provision, which is not exactly like search/seizure, but allows the departmental authorities to visit place of business of a dealer. This provision is contained in section 22 of MVAT Act i.e. Business Audit. The business audit contemplates audit of records of a dealer by sales tax authorities at the place of business of the dealer. As per the provisions of law, it has to be by prior intimation and cannot be a surprise visit in the nature of search/seizure.

However, the Commissioner of Sales Tax has issued a Trade Circular bearing No.25T of 2008 dt.23.7.2008, in which the scope of Business Audit is explained. From the said Circular, it is clear that this provision can be treated as relating to search/seizure, if the department wants to do the same. From the above circular, it is also clear that the powers are almost the same as search except that the authorities cannot seize the records. However they can call for the investigation team and convert the ‘business audit’ into ‘search and seizure’ action, ultimately the result will be same. This provision is, therefore, called “Mini Enforcement”.

Conclusion

Though the search/seizure provisions are necessary for effective implementation of the Act, we hope that the same will be utilised in a fair manner and with the utmost care. It should not become a tool in the hands of authorities to harass the dealers.

Nirav Shah

‘Sale in transit’ vis-à-vis S.C. judgment in A & G Projects & Technologies

VAT

A very interesting but confusing situation has arisen in
relation to ‘sale-in-transit’. As per the provisions of Central Sales Tax Act,
1956, each inter-State sale is liable to tax. However, the intention of the
Government is not to levy tax on all such transactions when such transactions
are effected in the course of single movement. In other words, under the CST Act
an exempted sale category has been carved out so as to give exemption to
subsequent inter-State sale in the course of single movement. The reference is
to the provisions of S. 6(2) of the CST Act, 1956. The said Section is
reproduced below for ready reference :

“6 Liability to tax on inter-State sales

(2) Notwithstanding anything contained in Ss.(1) or
Ss.(1A), where a sale of any goods in the course of inter-State trade or
commerce has either occasioned the movement of such goods from one State to
another or has been effected by a transfer of documents of title to such goods
during their movement from one State to another, any subsequent sale during
such movement effected by a transfer of documents of title to such goods to a
registered dealer, if the goods are of the description referred to in Ss.(3)
of S. 8, shall be exempt from tax under this Act.

Provided that no such subsequent sale shall be exempt from
tax under this sub-section unless the dealer effecting the sale furnishes to
the prescribed authority in the prescribed manner and within the prescribed
time or within such further time as that authority may, for sufficient cause,
permit, :

(a) a certificate duly filled and signed by the
registered dealer from whom the goods were purchased containing the
prescribed particulars in a prescribed form obtained from the prescribed
authority, and

(b) if the subsequent sale is made to a registered
dealer, a declaration referred to in Ss.(4) of S. 8.

Provided further, that it shall not be necessary to furnish
the declaration referred to in clause (b) of the preceding proviso in respect
of a subsequent sale of goods if, :

(a) the sale or purchase of such goods is, under the
sales tax law of the appropriate State exempt from tax generally or is
subject to tax generally at a rate which is lower than three per cent or
such reduced rate as may be notified by the Central Government, by
notification in the Official Gazette, under Ss.(1) of S. 8 (whether called a
tax or fee or by any other name); and

(b) the dealer effecting such subsequent sale proves to
the satisfaction of the authority referred to in the preceding proviso that
such sale is of the nature referred to in this sub-section.”

The implication of above Section is that the first
inter-State sale transaction will fall u/s.3(a) of the CST Act and, therefore,
be liable to tax in the hands of first vendor in the moving State. However
subsequent sale effected by first purchaser, by transfer of documents of title
to goods, to his purchaser will be exempt. In fact any number of such sales
effected during the course of the said movement will remain exempt. As defined
u/s.3(b) of the CST Act, the movement of goods commences when the goods are
handed over to the common carrier and it ends when the delivery of the same is
taken from carrier. Thus during this course of movement, a number of
transactions can take place and they will be exempt. However for availing the
exemption the respective selling dealer will be liable to collect the pair of
forms as stated below.

When the first purchaser sells, he will be required to
collect E-I form from his vendor and C form from his purchaser.

When the subsequent purchaser sells, he will be required to
collect E-II form from his immediate vendor and C form from his buyer. This pair
of E-II and C forms will continue for all subsequent sales taking place in the
course of the same movement. Thus a very good facility has been provided by the
law to avoid cascading burden of tax. Except tax on the first transaction the
tax burden on subsequent sale transactions in the same movement can be avoided.
In popular terms this type of sales are referred to as ‘in-transit sales’.

The nature of ‘in-transit sale’ is now clear by number of
judgments. There can be different situations about the above exempted category
of sale. The simple is that the first purchaser buys the goods without reference
to any pre-existing order from his customer. However after the goods are in
transit he may receive the order from buyer and sell the goods by transfer of
documents. There cannot be any dispute about this transaction and it is
straightaway covered by S. 6(2).

However, dispute sometimes arises when the first purchaser
has pre-existing order. For example, A in Maharashtra has order for supply from
B in Gujarat. A purchases the said goods from C in Tamil Nadu and directs C to
dispatch the goods to B. In this case sale by C to A will be first inter-State
sale and sale by A to B will be subsequent inter-State sale and this will be
exempt subject to production of forms. However the sales tax authorities take
objection that since the goods were already earmarked for B, before putting the
goods in transport, the exempted sale as ‘sale-in-transit’ cannot take place.

However this cannot be a correct position. It is true that there was pre-existing order with A and accordingly the goods were purchased from C. However the sale to B by A is taking place only at the time of putting the goods in carrier. It is at that point of time, because of the instructions of A, the goods are booked in the name of B and hence this is transfer of documents and accordingly covered by S. 6(2). The pre-existing order with A can at the most be considered to be agreement to sale, but actual sale is taking place when the transport documents are made in his name, because of instructions of A. In this respect it can also be mentioned here that there is no need for physical endorsement of transport documents and the transfer can take place by instructions also, which can be referred to as contractive transfer. In other words when the transport documents are taken out in the name of B, the goods stood transferred to B and that is because of contractive transfer of documents, the transaction is duly covered by S. 6(2), hence exempt, subject to other conditions.

This is now a settled law in light of number of judgments on the said issue. Reference can be made to the following judgments:

State of Gujarat v. Haridas MuIji Thakker, (84 STC 317) (Guj.) :

In this case the facts are that the Gujarat dealer received order from another dealer in Gujarat. For supplying the said goods, the vendor dealer in Gujarat placed order on Maharashtra dealer and instructed to send the goods directly to the Gujarat purchasing party. Gujarat High Court held that the sale by Maharashtra dealer to Gujarat vendor dealer is first inter-State sale and the one by Gujarat vendor to Gujarat purchasing dealer is second inter-State sale. The Gujarat High Court also held that the second inter-State sale is exempt u/ s.6(2) being effected by transfer of documents of title to goods. In this case though there was no physical transfer of L.R., etc. The Gujarat High Court held that there is constructive transfer by instruction and hence duly covered by S. 6(2). This judgment duly covers both issues that there is no need for physical transfer and also that having predetermined parties does not affect the claim.

Fatechand Chaturbhujdas v. State of Maharashtra, (S.A. 894 of 1990, dated 12-8-1991) (M.s.T. Tribunal) :

In this case the local party purchased goods from another local party and directed the same to be despatched to outside State party. Even though local party was shown as consignor, taking the view that while placing order there is term for outside place dispatches, Maharashtra Sales Tax Tribunal held that the sale between two local parties is first inter-State sale and the sale by local party to outside party is subsequent inter-State sale, duly exempt ul s.6(2).

Duvent Fans P: Ltd. v. State of TamiI Nadu, (113 STC 431) (Mad.) :

A local dealer purchased goods from another local dealer and directed to send them to his purchaser’s place in another State. The Madras High Court held that the first transaction is first inter-State sale and the second sale is also subsequent inter-State sale exempt ul s.6(2) of the CST Act. This judgment also clarifies the nature of exempted sales ul s.6(2) of the CST Act.

In fact there are many judgments on this issue. However, since the legal position about transfer of documents is clear from the above judgments, for sake of brevity no further citations are given here.

In the light of the above legal position the nature of ‘in-transit sale’ is fairly settled and dealers are day in and day-out effecting such type of transactions.

However, recently the Supreme Court has delivered judgment in case of A & G Projects & Technologies v. State of Karnataka, (19 VST 239) (sq. The facts in the above case are very peculiar and the gist is as under:

The appellant, a registered dealer under the Karnataka Sales Tax Act, 1957, as well as the Central Sales Tax Act, 1956, was engaged in execution of electrical contracts. It was awarded three independent contracts towards: (i) supply of capacitor banks, (ii) execution of civil works, and (iii) creation and commissioning of capacitor banks at various sub-stations of the Karnataka Power Transmission Corporation. Pursuant to those contracts the appellant appointed Bay West as contractor located outside Karnataka for procuring capacitor banks because the latter had a prior arrangement with the manufacturers. The appellant filed its return showing turnover of inter-State sales under the Central Sales Tax Act, 1956, contending that the goods originated from the manufacturers and ultimately reached the Corporation though title to the goods vested in Bay West. According to the appellant there were three sales and it claimed exemption from tax u/s.6(2) of the Central Sales Tax Act, 1956, on the ground that the second and third sales were subsequent sales. The Assessing Officer held that the appellant was not entitled to the exemption. The Tribunal held that the movement of goods was not from the State of Karnataka, but into the State and therefore there was no inter-State sale in the State of Karnataka. On revision the High Court held that the sale of goods in favour of the Corporation was complete when the goods were appropriated to the Corporation before the commencement of goods from the place of manufacture in Tamil Nadu to the Corporation in Karnataka and, therefore the inter-State sales fellu/s.3(a), thus not entitled to exemption u/ s.6(2). The Supreme Court proceeded on the fact that all three transactions are held to be covered by S. 3(a) of the CST Act by lower authorities and accordingly interpreting S. 9(1) of the CST Act decided that the transactions are liable to tax in moving State and notin State of Karnataka.

In the above case the Supreme Court was concerned about appropriate State entitled to levy tax in relation to inter-State sale covered by S. 3(a) read with S. 9(1) of the CST Act. As can be inferred from the judgment more than one inter-State sale transactions can be liable in the same State if they are covered by S. 3(a). The Supreme Court was not analysing S. 6(2). However while dealing with the issue in relation to S. 9(1), the Supreme Court has observed about nature of ‘in-transit sale’ which can be covered by S. 6(2). Relevant portion is as under:

“Within S. 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 S. 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. v. S. R. Sarkar, (1960) 11STC 655 (sq 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.” (Italics ours)

In the light of the above observations an issue arises as to whether having pre-existing order with the buyer will affect the claim. In the light of the above observations, one may be tempted to say that the ‘in transit sale’ must take place only after commencement of the movement and if there is a pre-exiting order with the ‘intransit’ seller, then such sale cannot qualify for S. 6(2). However it appears that such conclusion is not at all intended nor warranted.

As stated above, the Supreme Court was not analysing S. 6(2) as such, but it has referred to S. 6(2) for correctly defining scope of S. 9(1). Secondly, the Supreme Court has not laid down anything contrary so as to nullify the understanding till today as well as the above-referred High Court judgments. Even if there is pre-existing order it cannot be equated with the contract of sale. The sale takes place only when the transport documents are transferred or stand transferred by implication like contractual transfer. When the Supreme Court says about con-tract coming into existence after movement commences, the reference or the meaning of the term ‘contract’ used therein is to actual sale. The pre-existing order is at the most an agreement to sale, but the actual transfer of documents is a contract of sale and obviously the said contract is taking place after the movement has commenced, as discussed above. Therefore, on merits also the said observations are not laying down any different position. It is possible that because of the above observations the department may again proceed with their theory of existence of pre-existing order for disallowing claims. However, in the light of the position discussed above, it is not warranted and the legal position as prevailing today should remain applicable even after the above judgment.

Nirav Shah

Recent amendments to MVAT Act, 2002

VAT

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.

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
date

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
date

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.

(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.

Nirav Shah

Journal

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