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Input Tax Credit — Applicability of Rule 53(6) —A Few controversies

Input Tax Credit — Applicability of Rule 53(6) —A Few controversies

Value Added Tax System (VAT) has been made applicable for levy of Sales Tax in India from 1.4.2005. Though one of the objects to introduce VAT was to have uniformity in the Taxation Provisions in all the States of India, it is a well known fact that this object has not been achieved and almost all the States have their own levy systems. In Maharashtra, the VAT is being levied under Maharashtra Value Added Tax Act, 2002 (MVAT Act).

Input Tax Credit (ITC, also referred to as set off) is the backbone of VAT system. Therefore the ITC mechanism should be as simple as possible. The VAT system is considered to be ideal for avoiding cascading effect. Therefore dealers should get set off on all the purchases connected with his business. However, as per the current provisions under the MVAT Act, there are many restrictions as well as negative list about set off. In other words, set off is not allowed on all the purchases. Several purchases relating to the business are outside the scope of set off, like: purchases used for erection of immovable properties, purchase of passenger motor car, etc. There are also provisions to restrict setoff under certain circumstances. The reference here is to Rule 53(6) of MVAT Rules, 2005.

Under MVAT Act, section 48 provides for grant of set off to dealers. It also authorises the State Government to draft necessary rules. The State Government, under its authority, made the Rules about grant of set off. The said rules are contained in Rules 52 to 55 of MVAT Rules, 2005. Rule 52 speaks about eligibility to set off, Rule 54 gives negative list on which set off is debarred and Rule 53 provides for reductions from set off. Sub-rule (6) of Rule 53 is one of the most complicated and frequently amended Sub-rules providing for reduction/restriction in set off. The said Sub-rule, which was on the statute book since 1.4.2005, was substituted on 8.9.2006. And it was substituted once again, on 23.10.2008. The second substitution has been made effective from 8.9.2006. Thus, Rule 53(6) is now to be seen in its new form with effect from 8.9.2006. The said rule is reproduced below for ready reference.

53. Reduction in set-off

(A) The set-off available under any rule shall be reduced and shall accordingly be disallowed in part or full in the event of any of the contingencies specified below and to the extent specified. (1) to (5) . . . .

(6) If out of the gross receipts of a dealer, in any year, receipts on account of sale are less than fifty per cent of the total receipts, —

(a) then to the extent that the dealer is a hotel or club, not being covered under composition scheme, the dealer shall be entitled to claim set-off only, —

(i) on the purchases corresponding to the food and drinks (whether alcoholic or not) which are served, supplied or, as the case may be, resold or sold, and

(ii) on the purchases of capital assets and consumables pertaining to the kitchens and sale, service or supply of the said food or drinks, and

(b) in so far as the dealer is not a hotel or restaurant, the dealer shall be entitled to claim set-off only on those purchases effected in that year where the corresponding goods are sold or resold within six months of the date of purchase or are consigned within the said period, not by way of sale to another State, to oneself or one’s agent or purchases of packing materials used for packing of such goods sold, resold or consigned :

Provided that for the purposes of clause (b), the dealer who is a manufacturer of goods, not being a dealer principally engaged in doing job work or labour work, shall be entitled to claim set-off on his purchases of plant and machinery which are treated as capital assets and purchases of parts, components and accessories of the said capital assets, and on purchases of consumables, stores and packing materials in respect of a period of three years starting from the end of the year containing the date of effect of the certificate of registration.

Some important implications of the above rule can be considered as under :

i) If out of the gross receipts, the receipts from the sale of goods are less than 50% of the gross receipts, then this rule will apply. Therefore finding out above ratio is important. The comparison is to be done on yearly basis. This concept of making yearly comparison itself is against the very system of ITC under VAT. The setoff system should have free flow. Normally on entering the purchase in the records, the dealer should be entitled to claim set off of the same. In other words, set off should be eligible as soon as the purchase is entered in the books of account. However, as per above rule, this is not so.

Though the dealer claims the set off on effecting the purchase, he will be required to find out the correctness of the said claim after the end of the year. If the receipts from the sales are less than 50% of gross receipts, then the set off will be restricted to the purchases, as indicated in above rule. Amongst others, in case of dealers other than hotels, the set off will get disallowed on the capital assets as well as expenditure items debited to P & L A/c. Thus the original claim of the dealer will be wrong and such a dealer will be required to recalculate and reduce the setoff already taken by him, after the end of the year. Thus the very purpose of allowing set off as per the date of purchase gets defeated.

An issue again arises that if the set off is to be reduced after the end of the year, due to above application of rule 53(6), then in which returns the reduction is to be made. As per set off Rules the dealer is entitled to claim set off as soon as the purchase is entered into the books of accounts. As per rule 53(8) the reduction in setoff, due to contingency contained in rule 53, is to be given effect in the return period in which such contingency arises. In relation to rule 53(6) the contingency arises after the end of the year. Therefore, at the most, the effect to reduction in light of rule 53(6) can be given in the last return only. Hence the last return of the year can be revised to give effect to the above rule 53(6).

ii) The other issue arises as to the meaning of gross receipts. In the earlier un-amended rule the meaning of gross receipts for the purpose of rule 53(6) was explained by way of Explanation under the Rule. However, the said Explanation is now not appearing in this substituted rule. Therefore, the meaning remains to be ascertained by the dealer. Several issues may arise in this respect.

a) Whether only the receipts of Maharashtra are to be considered or all the activities, including activities in other States, are also to be considered ?

It is an important issue as the receipts from sale will certainly be relating to Maharashtra. The word ‘sale’ is defined in the MYAT Act and as per the said definition ‘sale’ means sale within the state of Maharashtra. Therefore, so far as. the receipts from sales are concerned they will mean only receipts of sales effected in the State of Maharashtra. Though the meaning of ‘gross receipt’ is not given, it is an accepted principle that only comparables can be compared. Therefore, if in relation to sales, receipts from sales effected only in Maharashtra are to be considered, then for gross receipts also receipts only from Maharashtra should be considered. Though this can be a fair interpretation it is better that the law itself provides for the meaning to avoid litigation in future.

b) The other issue in this respect is, what is to be included in gross receipts. One view can be that items appearing on the credit side of Trading A/c. and P & L A/c. should be considered. The other view can be that all receipts, on whatever account, should be considered. As per this view receipts on account of dealing in assets like sale of assets etc. should also be considered for gross receipts. In this respect also a clarification from the department is most welcome to avoid un-necessary debate. Normally, gross receipts should be restricted to receipts appearing on credit side of Trading and P & L Accounts excluding dealings in assets, etc. Receipts from sale of assets forming part of turnover of sales may also be considered for gross receipts. However receipts from sale of assets not covered by MYAT Act like sale of immovable properties or sale of shares etc., cannot get covered in gross receipts. However clarification from the Department on above aspect is necessary.

iii) Another important issue is that if this rule applies then in relation to dealers, other than hotels, set off is eligible only on purchases which are sold within six months from the date of purchase. This will require identification of purchase and sale. This condition also is not as per the spirit of ITC under VAT. Although in case of reseller the issue may not bother much as identification in such a case will normally be available, but in case of manufacturers, this kind of identification may pose several difficulties. The dealer will be required to adopt the system as permissible on the facts and circumstances of the case.

iv) This sub-rule may hit hard, manufacturers. It provides that a manufacturer will be eligible to get set off on plant and machinery etc., even if the sales are less than 50% of the gross receipts. However, this concession is given only for three years from the end of the year in which the registration has been granted. It can be said that this exception is provided for new manufacturing dealers. However, in these initial years existing dealers can also avail the benefit. The MVAT Act has been brought into effect from 1.4.2005. The registration granted under the BST Act, 1959 is deemed to have come to an end on 31.3.2005 due to abolition of the said Act. The registration numbers granted under the BST Act, 1959 continued in the VAT period also because of specific provision to that effect in the MV ATAct, 2002. Reference can be made to section 96 (1) (b) of MVAT Act, 2002, which reads as under.

96. Savings

1) Notwithstanding the repeal by section 95 of any of the laws referred to therein, —

“(b) any registration certificate issued under the Bombay Sales Tax Act, 1959, being a registration certificate in force immediately before the appointed day shall, in so far as the liability to pay tax under sub-section (1) of section 3 of this Act exists, be deemed on the appointed day to be the certificate of registration issued under this Act, and accordingly the dealer holding such registration certificate immediately before the appointed day, shall, until the certificate is duly cancelled under this Act, be deemed to be a registered dealer liable to pay tax under
this Act and all the provisions of this Act shall apply to him as they apply to a dealer liable to pay tax under this Act.”

In light of above, it can be said that the continuation of registration granted under BST Act in the MVAT period is as good as grant of new registration under the MVAT Act, 2002. Therefore, in case of existing dealers the three years from the end of the year in which registration is granted, is to be considered from 2005-06. In other words, existing dealers will get the benefit of above exception for three years from 2005-06 i.e. upto 2008-09.

The real difficulty arises after the three years are over. In such cases, inspite of fact that there are purchases of machinery etc., the dealers will not be entitled for any set off of taxes paid on purchase of such machineries. This will certainly be against the very purpose and spirit of the MYAT Act and the scheme of ITC under VAT.

v) One more issue which arises in respect of this sub-rule, is due to retrospective effect to the amended rule. Though the rule is substituted in October 2008, the effect is given from 8.9.2006. For example, a dealer might have claimed set off for the year 2006-07/2007-08 etc. in light of earlier Rule and would have claimed the set off accordingly in the returns. A situation may arise for reducing set off for earlier years in light of substituted rule due to retrospective effect given to it. The issue is who is responsible to carry out such reduction. There can be different situations. If the returns were already filed before the amendment date and VAT Audit was also carried out, then is there a responsibility on the dealer to file revised returns etc. ? The statutory time limit for filing revised returns is only 9 months from the end of the year. Therefore the department cannot insist for revising returns to give effect to retrospective effect after the end of the period for revising returns. There is also no obligation on the dealer to revise the returns after the end of the period for revising the returns, to give effect to the adverse amendment. In the amended rules also, there is no obligation or direction to the dealer to file revised returns to give effect to the amended rule for prior period. Therefore, the dealer is not required to take any action. However, the department can take action and by making assessment, give the due effect.

In fact there are number of such ambiguities in relation to rule 53(6). All are not discussed here for sake of brevity. The above are a few important ones and readers may also come across further issues in relation to above rule. We expect that the Government will come out with proper clarification on various issues, in above rule, keeping into account the prime role of ITC in a successful VAT system.

Nirav Shah

Filing of Returns and Payment of Taxes

VAT

The Government of Maharashtra has recently amended Rules 17,
18 and 81 of the Maharashtra Value Added Tax Rules, 2005. The forms, procedures
and periodicity in respect of filing of returns and payment of taxes have also
been modified. Certain dealers are now required to file e-returns and others may
find their periodicity changed from monthly to quarterly or from quarterly to
six-monthly. However, every dealer shall file his returns in the new format for
all the periods commencing from 1st April 2008

The amended periodicity, for filing returns may be summarised
as under :

Sr. No.	Category	Periodicity
1.	(a) Newly registered dealers (on or after 1st April 2008) (b) Retailers opted for Composition Scheme (c) Tax liability in the previous year up to Rs.1 lakh or refund entitlement up to Rs.10 lakhs.	6 monthly
2.	(a) Dealers under Package Scheme of Incentive (b) Tax liability in the previous year exceeds Rs.1 lakh, but up to Rs.10 lakhs or refund entitlement exceeds Rs.10 lakhs, but up to Rs.1 crore.	Quarterly
3.	All other dealers whose tax liability in the previous year exceeds Rs.10 lakhs or refund entitlement exceeds Rs.1 crore.	Monthly

The due date for filing return and for payment of taxes
continues to be the same i.e., within 21 days from the end of the
month, quarter or six months as the case may be.

The monthly returns are required to be filed for each
calendar month, quarterly returns for each quarter of three months (i.e.,
Apr-Jun, Jul-Sep, Oct-Dec and Jan-Mar) and six-monthly returns for the period of
six months (i.e., April to September and October to March).

The term ‘Tax liability’ has been defined in Explanation I to
Rule 17(4) of the MVAT Rules. Accordingly, it means the total of all taxes
payable by a dealer in respect of all of his places of business or as the case
may be, of all the constituents of his business in the State under the MVAT as
well as the CST Act after adjusting the amount of set-off or refund claimed by
him. Thus, for the purpose of calculating the tax liability, the tax payable at
all the places of business or all the constituents of business are to be
considered and the said amount shall be reduced by the amount of set-off or
refund actually claimed by the dealer.

Change in Return Forms and Electronic Filing of Returns :

(Refer : Government Notification dated 14-3-2008,
Commissioner’s Notification dated 14-3-2008, Trade Circular No. 8T/2008, dated
19-3-2008, 10T/2008, dated 3-4-2008, 16T/2008, dated 23-4-2008 and 17T/2008
dated 5-5-2008 :

The earlier return-cum-challan forms 221, 222, 223, 224 and 225 have been replaced with the new return-cum-challan forms 231, 232, 233, 234 and 235, respectively. The earlier CST return-cum-challan form has also been replaced by new return-cum-challan Form No. IIIE.

All returns pertaining to the month of April 2008 as well as the return to be filed in respect of periods starting on or after the 1st May 2008 are to be filed in the new forms.

Dealers whose tax liability in the financial year 2006-07 was equal to or above Rs.1 crore, have to file their return from February 2008 onwards in electronic form.

Dealers whose tax liability in the previous year, i.e., 2007-08 was equal to or above Rs.10 lakhs, have to file their return for the month of May 2008 onwards in electronic form.

Dealers eligible to file electronic return under MVAT Act/Rules should file their Central Sales Tax return in Form IIIE electronically.

Dealers required to file electronic return shall first make payment of tax in Form 210 or Form IIIE (for CST) and then file electronic return.

The procedure for filing e-returns has been explained on the new website of the Department at (http://www.mahavat.gov.in). A dedicated help desk is also created at Mazgaon Sales Tax Office to answer the queries pertaining to e-returns. In case of need, the dealer / s may contact the help desk at 022-23735621/022-23735816. Further assistance may be taken from the office of Joint Commissioner of Sales Tax (Returns) in Mumbai or the respective Joint Commissioners of Sales Tax in Mofussil Areas.

Note: The Commissioner of SalesTax,vide Circular dated 23rd April 2008has clarified that in the initial period, it is possible that the dealers may face some difficulties in preparing and uploading the electronic return. Considering the difficulties likely to be faced by these dealers, a concession is provided by allowing the dealer to upload the e-return within 10days from the due date for the filing of respective return. This concession shall be only for the return/ s to be filed for month of May 2008 to that of September 2008. The e-return for these months uploaded within 10 days from their due date will not be treated as late, provided the payment of due tax is made on or before the due date for normal filing of paper returns.

The applicability of new return forms may be tabulated as under:

Separate v. Consolidated Filing of Returns:

The provisions for filing separate returns [Rule 17(2) (c)] have been deleted in the recent amendment to the MVAT Rules. As a result, now dealers can’t file separate returns. Thus dealers who are having more than one place of business or who is having more than one constituents of business is required to file only one consolidated return, as per the applicable periodicity, for all the places of business or constituents of business, subject to the following exceptions:

i) If a dealer is holding an Entitlement Certificate and also carrying on other business activity, then he is required to file more than one return in respect of his other activity,

ii) If a dealer is a PSI unit or a notified oil company and also in the business of execution of works contract, transfer of the right to use any goods for any purpose or has opted for composition for part of his business, then in addition to return in Form 234 or 235, he shall also I file a separate return in Form no. 233.

Revised Return :

The revised return can be filed before the expiry of the period of nine months from the end of the year containing the period of such return or before the issuance of notice for assessment for that period, whichever is earlier.

As per the provisions of S. 32(3) of the MVAT Act, read with Rule 17(2)(d) of the MVAT Rules, it is specifically provided that, in case of revised return, the dealer shall first pay tax (in Challan Form No. 210) in Government Treasury and attach a self-attested copy of the paid Challan with the revised return, which shall be filed with the appropriate registering authority.

Prescribed Authority:

As per Rule 17 of the MVAT Rules, the prescribed authority, with whom a dealer is required to file his return/ s are as follows:

i) When tax is payable for any period, the return for that period shall be filed in Government Treasury as defined in Rule 2(f) of the MVAT Rules 2005.

ii) When tax payable is NIL or REFUND, then return shall be furnished to the registering authority within whose jurisdiction the principal place of business is situated. (In Mumbai, all such returns are to be filed at specific counters provided for the purpose at Vikrikar Bhavan, Mazgaon.)

iii) In case of non-resident dealer, if tax payable is NIL or REFUND, then the return shall be filed with the registering authority, Non-Resident Registration Circle, Mumbai, if the dealer is registered by such authority.

iv) PSI dealer shall file returns with the registering authority having jurisdiction over respective place of business of the dealer, in respect of which he holds a certificate of Entitlement under any PSI covering all the sales and purchases relating to the eligible industrial unit. However, it is provided that if tho dealer is holding two or more Entitlement Certificates, then he must file the returns with the registering authority, which has jurisdiction over the place of business pertaining to the Entitlement Certificate whose period of entitlement ends later.

It may be noted that S. 20 of the MVAT Act requires every registered dealer to file a correct, complete and self-consistent return and Rule 20 of the MVAT Rules clarifies that return/ s shall be deemed to be complete and self-consistent, only if the returns are filed:

in prescribed form,

for the specified period,

within the prescribed time,

to the prescribed authority, and

all the columns of the return form are filled properly.

Defect Memo & Fresh Return :

In case of an incorrect/incomplete or inconsistent return, the Sales Tax authority can issue a defect memo, u/s.22 of the MVAT Act. Such defect memo is prescribed in Form No. 212 and it can be issued within four months from the date of filing of the return. On receiving a defect memo, the dealer is required to file a Fresh Return.

The Registered Dealer, to whom such defect memo is issued, shall file a fresh correct, complete and self-consistent return within one month of the service of such defect memo. If the dealer fails to file the fresh return within one month, then such a dealer may be treated as defaulter in filing of return and it will be presumed that the dealer has not filed the original return at all within the prescribed time and thus he may be liable to face penalty provisions. It may be noted that the defect memo issued in Form No. 212 is not challengeable in appeal.

Penalty for Non-filing or Late Filing of Return/s:

The Government of Maharashtra has recently amended S. 29(8) of MVAT Act, 2002, whereby the penalty for non-filing and late filing of return/ s has been enhanced. As per the amendment, (which shall come into force from a date to be notified), if the return is filed before the initiation of the proceedings for levy of penalty, then the penalty shall be levied at rupees five thousand, instead of rupees one thousand as provided earlier. In other cases, the amount of penalty imposable is increased from rupees two thousand to rupees ten thousand.

Nirav Shah

Nature of Inter-State Lease Transaction vis-À-vis normal inter-state sale

VAT

An important issue arose before the Maharashtra Sales Tax
Tribunal in respect of nature of interstate lease transaction in the case of
Thermax Babcock & Wilcox Ltd. (S.A. 1285 of 2003, dated 14-12-2009). The facts
are that M/s. RIL entered into a lease transaction for lease of boiler with M/s.
RUPL. Both parties are located in Gujarat. M/s. RUPL placed order on M/s. T of
Pune for supply of boiler component. The unloading place was RIL in Gujarat. The
period involved was 1997-98. M/s. T collected ‘C’ Form from RUPL. In the
assessment of T, tax at 4% was levied on the above supply value under the CST
Act, 1956. The appellant, M/s. T was agitating the levy of tax on the ground
that his supplies to RUPL are in the course of inter-state lease and the period
being prior to 11-5-2002, tax is not attracted. It was submitted that the lease
transactions are brought in the CST Act from 11-5-2002 and hence the levy of tax
in case of the appellant was argued to be illegal and unlawful.

Thus the issue before the Tribunal was whether the
transaction of M/s. T to supply boiler parts to M/s. RUPL, who has leased boiler
to M/s. RIL, amounts to inter-state lease transaction. The gist of arguments of
the appellant may be noted as under :

(a) There was a tripartite agreement between the T, RUPL and RIL.

(b) There was a lease agreement between RUPL and RIL by which the lessor, RUPL, agreed to purchase the goods (auxiliary boiler) from the appellant (M/s. T) and lease it out to RIL (lessee). The lease agreement between RUPL and RIL has identified M/s. T as a manufacturer and supplier of required goods as per the specification and design agreed upon.

(c) RUPL has placed the purchase order pursuant to lease agreement between RUPL and RIL and accordingly the goods manufactured by the appellant (M/s. T) have been moved from Pune to Jamnagar (Gujarat). These goods were dispatched to RIL, Jamnagar A/c RUPL who was described as consignee.

(d) When the manufacturer dispatched the goods to the consignee ‘RIL A/c RUPL’ and handed over the goods to the common carrier, according to M/s. T, the right to use the goods got transferred to the consignee, RIL.

(e) Since these transactions involved inter-state movement from Maharashtra to Gujarat, it was an inter-state lease transaction, not liable to tax, being effected prior to the amendment in the Central Sales Tax Act, 1956 to this effect.

(f) According to M/s. T, the facts and the ratio laid down in the case of M/s. ITC Classic Finance & Services v. Commissioner of Commercial Tax, Andhra Pradesh, (97 STC 337) are similar to those present in the case of the appellant, and therefore, prayer was made to delete the tax levied on inter-state lease transactions @ 4% against declarations in Form ‘C’, which were issued as a matter of abundant caution.

The M.S.T. Tribunal examined the above arguments in light of
legal position about inter-state sales transactions, as well as nature of the
lease transaction. Citing the judgments in the case of M/s. Magnese Ore India
Ltd. (37 STC 489) & M/s. Mohmad Sirajuddin (36 STC 136) (SC), the Tribunal
observed as under in relation to the inter-state lease transaction :

“That the following conditions must be fulfilled before the
sale can be said to take place in the course of inter-state trade;

1. There is a contract of sale, which contains a
stipulation express or implied, regarding the movement of the goods from one
state to another.

2. In pursuance of that agreement, the goods in fact move
from one state to another.

3. Ultimately a concluded sale takes place in the state
where the goods are sent, which must be different from the state from which
the goods moved.

If these conditions are complied with, then by virtue of S. 9
of the Central Act, it is the state from which the goods moved which will be
competent to levy the tax under the provision of the Central Act.”

The M.S.T. Tribunal also referred to the judgments cited by
the appellant viz. M/s. ITC Classic Finance & Services (97 STC 330) and M/s.
Srei International Finance Ltd. (16 VST 193). In this respect, the M.S.T.
Tribunal observed that in these judgments the issue was about lease charges
charged by respective parties. The Tribunal observed that in the present case,
the amount charged by the appellant is for supply of goods and not for leasing
of goods. Therefore, the M.S.T. Tribunal held that these judgments are not
applicable to the present case.

The Tribunal noted the factual position as under :

The appellant is a
manufacturer and supplier of boilers and its parts.

It is an admitted fact
that RUPL entered into an agreement to lease out the goods required by RIL,
and this lease agreement was signed on 6-6-1997.

This lease agreement was
between RUPL and RIL and not with the appellant M/s. T.

As per this lease
agreement, the lessor (RUPL) agreed to give and the lessee (RIL) agreed to
take on lease diverse equipment, details and aggregated amount whereof was
specified in Schedule-I attached to that agreement on the terms and conditions
mentioned therein.

As per this lease
agreement the lessor (RUPL) agreed to transfer the right to use by way of
lease and RIL (lessee) agreed to take on lease the equipment to be operated
under the supervision and the technical assistance of RUPL.

The lease agreement has
identified M/s. T as a vendor who was to manufacture and supply auxiliary
boilers at particular value.

The Schedule-I also referred to purchase order No. 22960-EE-MBB001-MA, dated 2nd August, 1997, which appears at Sr. No. 45 along with other vendors who were also identified as manufactures and suppliers of various parts and components for installing power plant at Jamnagar for RIL.

The total value of entire lease agreement was at a much higher amount than the sale value of goods by the appellant.

The Schedule 2 indicated that after the installation of power plant, RUPL was entitled to receive monthly lease at particular amount from RIL, with whom lease agreement was made.

Based on the above facts, the Tribunal held that RUPL becomes owner of goods after supply by M/s. T. RUPL has leased the goods as his goods. Therefore, the transaction by M/s. T was pure and simple normal sale for supply of goods and not a lease transaction. Accordingly, the Tribunal rejected the arguments of the appellant holding as under :

1. The agreement between the appellant and RUPL was not a lease agreement which stipulated handing over the possession of goods for absolute use.

2. There was an agreement which is reflected in the purchase order placed by RUPL, which proves that the agreement was for transfer of property in the goods and not transfer of right to use the goods as contemplated under the Lease Act.

3. RUPL has to first acquire the property in goods by way of purchase from the appellant to become absolute owner of property and then only RUPL becomes legally competent to lease out this property and not otherwise. When RUPL acquired the property in goods, inter-state sale got concluded, which was effected by the appellant (M/s. T). The Tribunal observed that M/s. T has failed to establish inextricable link.

Accordingly, the M.S.T. Tribunal held that the leasing is between RUPL and RIL which is a separate transaction. The sale by M/s. T to RUPL is normal sale liable to tax and as such the Tribunal confirmed the levy of tax under the CST Act, 1956.

Nirav Shah

InterState Sale — Judicial Interpretation vis-à-vis delivery of goods

InterState Sale — Judicial Interpretation vis-à-vis delivery of goods :

InterState sale transactions are covered by the Central Sales Tax Act, 1956 (CST Act). The nature of interState sale has been defined in Section 3 of the CST Act. In fact there are two sub-sections namely 3(a) and 3(b). Section 3(a) covers direct interState sale involving movement of goods from one State to another State. Section 3(b) covers interState sale transaction effected by transfer of documents of title to goods during the movement of goods from one State to another State. The discussion here is in respect of nature of sale covered by Section 3(a).

Section 3(a) is reproduced below for ready reference.

“S.3. When is a sale or purchase of goods said to take place in the course of interState trade of commerce — A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase occasions the movement of goods from one State to another; or …”

Thus a sale occasioning movement of goods from one State to another State is covered by above sub-Section. However whether there is movement of goods from one State to another State, so as to be covered by Section 3(a), is required to be ascertained from facts of the case. Where the vendor dispatches the goods to the buyer in other State there is not much difficulty. However when there is no direct dispatch proof the difficulty arises. For example, a buyer from another State has taken delivery from the vendor at his premises. Whether such transactions will be interState or intra State raises an issue. Such issue has to be decided based on relevant other documents/circumstances. There are certain decisions by various forums to ascertain the correct position. Reference can be made to following few judgments for looking further into the subject.

Nivea Time (108 STC 6) (Bom.) :

The observations of the Bombay High Court on nature of interState sale are as under :

“8. Section 3 of the Central Sales Tax Act, 1956 lays down when a sale or purchase of goods is said to take place in the course of interState trade or commerce. It says :

“A sale or purchase of goods shall be deemed to take place in the course of interState trade or commerce if the sale or purchase —

(a) occasions the movement of goods from one State to another; or

(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.”

In this case, we are concerned with sale or purchase falling under clause (a).

9. It is well-settled by now by a catena of decisions of the Supreme Court that a sale can be said to have taken place in the course of interState trade under clause (a) of Section 3, if it can be shown that the sale has occasioned the movement of goods from one State to another. A sale in the course of interState trade has three essentials : (i) there must be a sale; (ii) the goods must actually be moved from one State to another; and (iii) the sale and movement of the goods must be part of the same transaction. The word ‘occasions’ is used as a verb and means to cause to be the immediate cause thereof. There has to be a direct nexus between the sale and the movement of the goods from one State to another. In other words, the movement should be an incident of and necessitated by the contract of sale and be interlinked with the sale of goods.”

In this case there was no direct dispatch proof. However the buyer was from other State and goods purchased were meant for factory in other State. The Hon’ble High Court held transaction as interState sale.

English Electric Company of India Ltd. vs. Deputy Commercial Tax Officer [1976] (38 STC 475) (SC)

In this case, the Supreme Court observed as under :

‘…. – If there is a conceivable link between the movement of the goods and the buyer’s contract, and if in the course of interState movement the goods move only to reach the buyer, in satisfaction of his contract of purchase and such a nexus is otherwise inexplicable, then the sale or purchase of the specific or ascertained goods ought to be deemed to have taken place in the course of interState trade or commerce as such a sale or purchase occasioned the movement of the goods from one State to another ….”

From the above judgments it becomes clear that unless a link between dispatch and pre-existing sale is established, no interState sale can take place. The movement is to be cause and effect of such sale. In light of the above judgments for practical purposes following aspects of a transaction are looked into;

(a) There must be pre existing sale from a buyer from other State.

(b) The goods should be ascertained qua such pre existing sale to fulfil the requirement of such sale.

(c) The said goods should be moved to other State. It is necessary that same goods in the same quality and the same quantity are moved to other State.

(d) The same goods should be delivered to buyer so as to complete the interState sale.

(e) Once the above criteria are fulfilled, then even if delivery is local, the transaction will be interState sale.

Who moves the goods ? It is not very much important. Link between sale and movement is relevant. Therefore, even if local delivery is given but if goods are to be taken to other State by buyer it will be interState sale. However to comply with the conditions of Section 3(a), following proof should be preserved :

a) Purchase order from the buyer stating that the goods are meant for his place in other State and he will move the goods to such place.

b) Confirmation from the buyer that the goods are taken to such place.

If the above evidence is available it will be interState sale. However, if such evidence is lacking, then the transaction will be a local sale transaction.

Saraswathi Agencies (21 VST 200) Mad.

In this case the link between the sale and movement was missing, though buyer was from other State. The transaction was held to be local sale. The gist of the said judgment is as under.

“In order to come under the category of interState sale, the sale should be to a purchaser outside the State and there should be movement of goods from one State to another. In case the movement of goods from one State to another was occasioned on account of the agreement entered into between the seller and the purchaser, the sale is a sale in the course of interState trade attracting the provisions of the Central Sales Tax Act, 1956. But when the actual movement of goods was at the instance of the purchaser and the part played by the dealer was: only delivery of the articles at the place of business of the dealer, it cannot be said that there was an interState sale warranting payment of Central sales tax. The dealer should have undertaken the task of supplying the articles in the business place of the purchaser in different States for the purpose of the, Central Sales Tax Act. Therefore the paramount consideration in the matter of interState sale is the contract as well as the movement of goods.

The petitioner, a dealer in electrical goods, wet grinders, pumpsets, etc., for the assessment year 1994 – 95 reported nil total and taxable turnover under the CST Act. The Assessing Officer fourtd that the sale in favour of purchasers from Kerala; Karnataka and Andhra Pradesh were not shown in the accounts. Accordingly, the assessing authority considered those sales as interState sales. The petitioner appealed before the Appellate Assistant Commissioner who confirmed the assessment. THe Appellate Tribunal was also of the opinion that the bills having been raised in the name of tli.”e consumers from other States, the transactions were interState sales liable for payment of tax under the Central Sales Tax Act. On writ petition, the Madras High Court held;

If purchasers from neighbouring States came to Chennai and made purchases from the dealer in Chennai and took articles to their home State on their own, it could not be said that there was an element of interState sale in the transaction. There was no evidence to show that the petitioner itself had dispatched the goods through lorry service to the Sta tes of Karna taka, Kerala and And hra Pradesh. No evidence was found in the assessment order to show such dispatch by the dealer. It was the consistent case of the dealer that the goods were delivered at Chennai only, though the purchasers were from the neighbouring States. There was no obligation on the part of the petitioner to transport those articles to the actual place of the purchasers. Unless and until it was proved that the products were actually delivered by the dealer in the respective States as shown in the bills, it could not be said that the transaction was an interState trade.

In the absence of any such positive material evidencing interState sale, the sales as found in the assessment order could not be termed to be sales in the course of interState trade warranting payment of tax under the Central Sales Tax Act.

Burden of Proof:

Commissioner of Sales Tax, V.P., Lucknow vs. Suresh Chand Jain (70 STC 45)(SC) :

In this case the Hon’ble Supreme Court dealing with the facts given below, also dealt with issue of burden of proof. The Honble Supreme Court observed as under:

“The respondent, a dealer carrying on business in tendu leaves in U.P., had claimed from the very beginning that he had effected only local sales of the tendu leaves, that he had not effected any sales of tendu leaves in the course of inter-State trade, that he had never applied to the Forest Department for issue of form T.P. IV and no such forms were issued to him, and that the tendu leaves were never booked by him through railway or trucks for places outside U.P. The Appellate Tribunal found nothing to discredit the version of the dealer. The Tribunal had also taken notice of T.P. form IV which did not relate to sale but was a permit or certificate regarding the validity of nikasi of tendu leaves from the forest. The Tribunal accepted the claim of the dealer and held that the sales in question were not inter-State sales. On revision, the High Court found no material to interfere. On a petition for special leave filed by the Department:

The Supreme Court dismissing the petition held that the Tribunal applied the correct principle of law, viz., that the condition precedent for imposing sales tax under the Central Sales Tax Act, 1956,was that the goods must move out of the State in pursuance of some contract entered into between the seller and the purchaser.

A sale can be said to be in the course of inter-State trade only if two conditions concur, uiz., (i) a sale of goods and (ii) a transport of those goods from one State to another. Unless both these conditions were satisfied, there could be no sale in the course of inter-State trade. There must be evidence that the transportation was occasioned by the contract and as a result goods moved out of the bargain between the parties, from one State to another.

The onus lies on the Revenue to disprove the contention of the dealer that a sale is a local sale and to show that it is an inter-State sale.”

Thus burden to prove a particular fact lies on the party who alleges otherwise. In fact there are number of rulings in relation to this issue. The above are indicative to look a little more into the subject.

Nirav Shah

Determination of value of goods and value of services — Domain of contracting parties

Nirav Shah

Penalty vis-à-vis Mens Rea in relation to CST Act, 1956

VAT

Introduction :

Normally all fiscal laws
contain penalty provisions. The intention of such provisions is to have
deterrent effect on the defaulting dealers. However, in what circumstances
penalty can be levied is an issue to be appreciated by authority empowered to
levy the penalty. There are number of judgments where it is held that for levy
of penalty mens rea is a condition precedent. There are also judgments where it
is observed that mens rea may not be necessary to be proved for levy of penalty
under fiscal laws. Normally in relation to fiscal laws reference is made to the
landmark judgment of the Supreme Court in case of Hindustan Steel Ltd. (25 STC
211) (SC) wherein the Supreme Court has observed about nature and incidence of
penalty under fiscal laws. The relevant para is reproduced below:

“Under the Act penalty may
be imposed for failure to register as a dealer : S. 9(1) r/w S. 25(1)(a) of the
Act. But the liability to pay penalty does not arise merely upon proof of
default in registering as a dealer. An order imposing penalty for failure to
carry out a statutory obligation is the result of a quasi-criminal proceeding,
and penalty will not ordinarily be imposed unless the party obliged either acted
deliberately in defiance of law or was guilty of conduct contumacious or
dishonest, or acted in conscious disregard of its obligation. Penalty will not
also be imposed merely because it is lawful to do so. Whether penalty should be
imposed for failure to perform a statutory obligation is a matter of discretion
of the authority to be exercised judicially and on a consideration of all the
relevant circumstances. Even if a minimum penalty is prescribed, the authority
competent to impose the penalty will be justified in refusing to impose penalty,
when there is a technical or venial breach of the provisions of the Act or where
the breach flows from a bona fide belief that the offender is not liable
to the act in the manner prescribed by the statute. Those in charge of the
affairs of the company in failing to register the company as a dealer acted in
the honest and genuine belief that the company was not a dealer. Granting that
they erred, no case for imposing penalty was made out.”

Recently, the Supreme Court
had an occasion to decide one such penalty matter under the CST Act, 1956 in
case of M/s. Commissioner of Sales Tax, U.P. v. Sanjiv Fabrics, (35 VST 1) (SC).

The facts are that, as per
Registration Certificate under the CST Act, 1956 the dealer was authorised to
purchase cotton/cotton yarn on C Form. However the dealer had purchased cotton
waste, polythene, sutli and tat against C Form. The lower authority considered
the said purchases as unauthorised and levied penalty u/s.10(b) read with S. 10A
of the CST Act, 1956.

The further fact is that
when the issue of penalty came up, the dealer applied for amendment of
registration certificate. Against the penalty order an appeal was filed but the
dealer failed. The Tribunal also upheld the penalty on the ground that cotton
and cotton wastes are two different commodities, hence, there was sufficient
cause for penalty. The argument of the dealer was that he has acted under
bona fide belief that cotton includes cotton waste. The matter was carried
further to the High Court by the dealer. The Allahabad High Court allowed the
appeal by observing as under :

‘Cotton’ and ‘Cotton Waste’
are two different commodities known to Sales Tax Laws. However, there is not
much distinction from the point of view of ordinary people. The applicant is a
registered dealer since the A.Y. 1977-78 and has been making purchases of
‘Cotton waste’ and issuing Form C thereof since then. The department earlier
than October 15, 1985 raised no objection. This as was submitted by the learned
counsel for the applicant is very relevant
circumstance for determination of the question ‘false representation’ occurring
in S. 10(b) of the Act . . . . When Tax Laws are so complex the administration
should proceed specially in the penalty matter from the view of ordinary citizen
who is always willing to comply with the conditions of law. The assessee as soon
as it came to know about its (sic) fault filed application for amendment of
registration certificate. Some fault was on the part of the Department also for
maintaining silence over the period of about eight years.”

The Sales Tax Department
preferred SLP before the Supreme Court contending that mens rea is not an
essential ingredient of the offence u/s.10(b) of the CST Act, 1956 and it is in
the nature of civil liability. It was further argued that if prosecution is
launched, only then mens rea assumes importance.

The argument of the dealer
was that the penalty u/s.10(b) is in lieu of prosecution and mens rea would be
sine qua non for attracting the said penalty.

The Supreme Court referred
to relevant provisions of the CST Act, 1956 i.e., S. 10(b) and S. 10A which are
reproduced below :

“10. Penalties

If any person —

“(b) being a registered
dealer, falsely represents when purchasing any class of goods that goods of
such a class are covered by his certificate of registration, or . . . .”

“10A.
Imposition of penalty in lieu of prosecution

(1) If any person purchasing goods is guilty of an offence under clause (b) or clause (c) or clause
(d) of S. 10, the authority who granted to him or, as the case may be, is competent to grant to him a certificate of registration under this Act may, after giving him a reasonable opportunity of being heard, by order in writing, impose upon him by way of penalty a sum not exceeding one and a half times the tax which would have been levied under Ss.(2) of S. 8 in respect of the sale to him of the goods, if the sale had been a sale falling within that sub-section. Provided that no prosecution for an offence u/s.10 shall be instituted in respect of the same facts on which a penalty has been imposed under this Section.”

The Supreme Court observed that the real issue is to see what is the significance of using the words ‘falsely represents’. In light of the above, the Supreme Court wanted to find out whether the above term contemplates concept of mens rea. Supreme Court referred to earlier judgment in the case of Nathulal v. State of Madhya Pradesh, (AIR 1966 SC 43) and referred to the following observations:

“Mens rea is an essential ingredient of a criminal offence. Doubtless a statute may exclude the element of mens rea, but it is a sound rule of con-struction adopted in England and also accepted in India to construe a statutory provision creating an offence in conformity with the common law rather than against it unless the statute expressly or by necessary implication excluded mens rea. The mere fact that the object of the statute is to promote welfare activities or to eradicate a grave social evil is by itself not decisive of the question whether the element of guilty mind is excluded from the ingredients of an offence. Mens rea by necessary implication may be excluded from a statute only where it is absolutely clear that the implementation of the object of the statute would otherwise be defeated. The nature of the mens rea that would be implied in a statute creating an offence depends on the object of the Act and the provisions thereof ….”

The Supreme Court referred to the judgment in the case of Union of India v. Dharamendra Textile Processors, (2008) 13 SCC 369 and simultaneously also referred to the judgment in the case of Union of India v. Rajasthan Spinning & Weaving Mills, (2009) (13 SCC 448) and observed that “in examining whether mens rea is an essential element of an offence created under a taxing statute, regard must be had to the following factors:

(i)   the object and scheme of the statute;
(ii)   the language of the Section; and
(iii)   the nature of penalty.”

On overall appreciation of S. 10(b) and legal position about mens rea, the Supreme Court held as under:

“In view of the above, we are of the considered opinion that the use of the expression ‘falsely represents’ is indicative of the fact that the offence u/s.10(b) of the Act comes into existence only where a dealer acts deliberately in defiance of law or is guilty of contumacious or dishon-est conduct. Therefore, in proceedings for levy of penalty u/s.10A of the Act, burden would be on the Revenue to prove the existence of circumstances constituting the said offence. Furthermore, it is evident from the heading of S. 10A of the Act that for breach of any provision of the Act, constituting an offence u/s.10 of the Act, ordinary remedy is prosecution which may entail a sentence of imprisonment and the penalty u/s.10A of the Act is only in lieu of prosecution. In light of the language employed in the Section and the nature of penalty con-templated therein, we find it difficult to hold that all types of omissions or commissions in the use of Form ‘C’ will be embraced in the expression ‘false representation’. In our opinion, therefore, a finding of mens rea is a condition precedent for levying penalty u/s.10(b) read with S. 10A of the Act.”

Accordingly the Supreme Court held that mens rea was required to be satisfied before levy of penalty. The Supreme Court remitted the matters back to the adjudicating authority for fresh consideration of the issue, in light of the findings of the mens rea on part of the dealer.

Nirav Shah

Road map to GST

In view of the announcement made by the Union Finance Minister, in his budget speech, to introduce Goods and Services Tax (GST), from 1st April 2010, in place of existing indirect taxes all over India, the Empowered Committee of State Finance Ministers has released its First Discussion Paper on 10th November 2009. And it has invited views and suggestions from all stake-holders.

Although only a broad outline of the proposed GST has been presented through this Discussion Paper, the detailed aspects thereof are yet to be revealed. It is now up to the trade, industry, professionals and people in general to come forward and give their views and suggestions, so the same can be considered by the Government before making a final draft of the proposed Law.

The views presented by the Empowered Committee, through its First Discussion Paper on GST, may be summarised as follows :

1. It would be dual GST i.e., Central GST and State GST.

2. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute separate for each State).

3. Central GST shall be administered by the Central Government and State GST by respective State Government.

4. The Central GST and State GST are to be paid to the accounts of the Centre and the States separately.

5. Since the Central GST and State GST are to be treated separately, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilised only against the payment of Central GST. The same principle will be applicable for the State GST. A taxpayer or exporter would have to maintain separate details in books of account for utilisation or refund of credit.

6. Cross-utilisation of ITC between the Central GST and the State GST would not be allowed except in the case of inter-State supply of goods and services, which shall be liable for IGST.

7. The inter-State transactions of goods as well as services shall be liable for IGST (i.e., CGST plus SGST) with full credit in the State of destination.

8. Although CGST and SGST would be applicable to all transactions of goods and services made for a consideration, except on exempted goods and services, there would also be a list of items which shall remain out of the purview of GST.

9. The State Governments shall continue to levy excise duty and sales tax (VAT) on production/sale/purchase of goods, which are outside the purview of GST.

10. The imports shall be liable for CGST as well as SGST to be levied by Central and State Governments, respectively.

11. The Empowered Committee has recommended that certain taxes and levies, presently levied by the Central Government and the States, should be subsumed in GST, however whether to include or not certain other taxes and levies, the matter is still under consideration.

12. Although, rates of tax are yet to be decided, the Discussion Paper indicates that there may be more than two rates of tax. The rate of CGST and the rate of SGST on various goods and services may be different. The rate of tax on goods and the rate of tax on services may also differ.

13. While the threshold limit of gross annual turnover for SGST is proposed to be Rupees 10 lacs (both for goods as well as services), the threshold for CGST may be Rupees 150 lacs and a separate threshold of CGST may be worked out in respect of annual turnover of services.

14. The exemptions, remissions, etc. in relation to Special Industrial Area Schemes are proposed to be continued till legitimate expiry time both for the Centre and the States.

15. Each taxpayer would be allotted a PAN-linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for income-tax, facilitating data exchange and taxpayer compliance.

16. The taxpayer would need to submit periodical returns, in common format as far as possible, to both the Central GST authority and to the concerned State GST authorities.

The Empowered Committee has recommended that, to begin with, the following taxes and levies may be subsumed in the proposed Goods and Services Tax :

A. Central Taxes :

(i) Central Excise Duty

(ii) Additional Excise Duties

(iii) Excise Duty levied under the Medicinal and Toiletries Preparation Act

(iv) Service Tax

(v) Additional Customs Duty, commonly known as Countervailing Duty (CVD)

(vi) Special Additional Duty of Customs — 4% (SAD)

(vii) Surcharges, and

(viii) Cesses

B. State Taxes :

(i) VAT/Sales tax.

(ii) Entertainment tax (unless it is levied by the local bodies).

(iii) Luxury tax.

(iv) Taxes on lottery, betting and gambling.

(v) State Cesses and Surcharges insofar as they relate to supply of goods and services.

(vi) Entry tax not in lieu of Octroi.

There are several other taxes and levies on which a consensus is yet to be arrived.

Nirav Shah

Whether ‘F’ Forms are Required on Monthly Basis?

Introduction
When there is inter-state branch transfer or interstate consignment transfer, the transferor branch has to obtain ‘F’ form, under CST Act, 1956, from the transferee branch. The procedural requirements about ‘F’ forms are mentioned in rule 12(5) of CST (Registration & Turnover Rules), 1957. The said rule is reproduced below for ready reference: “

Rule 12. (5) The declaration referred to in s/s. (1) of section 6-A shall be in Form ‘F’:

Provided that a single declaration may cover transfer of goods by a dealer, to any other place of his business or to his agent or principal, as the case may be, effected during a period of one calendar month;

Provided further that if the space provided in Form ‘F’ is not sufficient for making the entries, the particulars specified in Form ‘F’ may be given in separate annexures attached to that form so long as it is indicated in the form that the annexures form part thereof and every such annexure is also signed by the person signing the declaration in Form ‘F’;

Provided also that Form ‘F’ in force before the commencement of the Central Sales Tax (Registration and Turnover) (Second Amendment) Rules, 1973, may continue to be used upto 31st day of December, 1980 with suitable modifications.”

Controversy
As can be seen from the above rule, one single ‘F’ form can cover transfers effected during one calendar month. In other words, if there are transactions of more than one month in one ‘F’ form than the said ‘F’ form may not be effective for transactions exceeding the month.

In most of the judgments, given by Hon’ble Maharashtra Sales Tax Tribunal, the above position is accepted. Reference can be made to the judgment of Hon’ble Tribunal in case of Akay Cosmetics Pvt. Ltd. (A.No.33 of 2008 & SA No.255 of 2009, SA No.610 of 2009 dt. 3.5.2010). In this case, Hon’ble Tribunal has held that if the ‘F’ form is for transactions exceeding one month then it should be allowed only for one month. It is also observed that the dealer can take benefit of month for which there is highest amount. However, it cannot be effective for transactions exceeding one particular month.

In this respect, generally reference is made to the judgment of Hon’ble Supreme Court in case of India Agencies (Regd.) v. Additional Commissioner of Commercial Taxes, Bangalore (139 STC 329)(SC). In this case the issue was about admissibility of ‘C’ form. The Supreme Court has observed that the ‘C’ form should be submitted as per rules. Taking note of this judgment, it is generally interpreted that the declaration forms should be as per rules.

Recent judgment of Calcutta High Court
Recently, the Hon’ble Calcutta High Court had an occasion to deal with the said situation. The ‘F’ form was covering transactions for more than one month and hence, it was disallowed. The assessee, i.e. Cipla Ltd., filed a Writ Petition in the Hon’ble High Court. The Calcutta High Court has delivered judgment in case of Cipla Ltd. vs. Deputy Commissioner, Commercial Tax, Corporate Division & Others which is reported in (61 VST 445)(Cal). In this judgment, Hon’ble High Court has held as under:

“The order has apparently been passed ex parte. Three F forms have been disallowed on the purported ground that the three F forms bearing nos. 37514, 37518 and 37521 covered transactions exceeding a period of one month. It appears that the Additional Commissioner, Commercial Taxes, West Bengal has misconstrued rule 12(5) of the Central Sales Tax (Registration and Turnover) Rules,1957 which provides that the declaration referred to in s/s. (1) of section 6A of the Central Sales Tax Act,1956 shall be in Form F. The proviso to rule 12(5) provides that a single declaration might cover transfer of goods, by a dealer, to any other place of business, or agent, or principal, as the case may be, effected during a period of one calendar month. There is nothing in the rules which can be constructed to vitiate a declaration form only on the ground that it covers transactions exceeding a period of over a month. The assessment has apparently been revised suo motu and ex parte on a misconception of rule 12(5) of the Rules. The impugned order is, thus, set aside and quashed.”

In light of the above, it can safely be inferred that even if the ‘F’ form is for transactions exceeding one month, it still will be valid for all the transactions. In this case, the judgment of Supreme Court in India Agencies is not cited or considered. However, since the High Court judgment is in relation to specific rule 12(5), it will be applicable, so far as ‘F’ forms are concerned.

Situation in other states
An issue can arise, as to whether the above judgment will be effective in other States also. In this respect, reference can be made to the judgment of Hon’ble Bombay High Court in case of Maniklal Chunnilal & Sons Ltd. vs. C.I.T. (24 ITR 375), wherein it is held that the judgment of any High Court under Central Act is binding in other States also except in a case where contrary judgment of the jurisdictional High Court of the respective state is available. The relevant portion of judgment is as under:

“A Special Bench of the Madras High Court has taken the view favourable to the Commissioner and contrary to the view suggested by Mr. Palkhiwala and in conformity with the uniform policy which we have laid down in income-tax matters, whatever our own view may be, we must accept the view taken by another High Court on the interpretation of the section of a statute which is an all-India statute.”

In light of the above, the judgment of the Calcutta High Court will be binding on other States also. It will be binding on Maharashtra also as there is no contrary judgment of the Hon‘ble Bombay High Court on the above issue.

Conclusion
It is a practical experience that getting declaration forms from the department is very difficult, more particularly, when substantial time has elapsed. It is also time consuming. Under the above circumstances, disallowance of claims on technical grounds cannot be justified. The judgment of the Calcutta High Court as such is very positive and practical and will give the much required relief to the dealers.

levitra

Nirav Shah

Pre-determined Sale vis-à-vis Exempted Sale u/s.6(2) of CST Act – Controversy Settled

Introduction

As per the scheme of Central Sales Tax Act (CST) when subsequent sale is effected in the course of the same movement, then it is exempted from tax as per section 6(2) of the CST Act, subject to production of C form and E1/E-II form as the case may be. There are a number of judgments throwing light on the various aspects of exempted sale u/s. 6(2). Reference can be made from important judgments like, State of Gujarat vs. Haridas Mulji Thakker (84 STC 317)(Guj), M/s.Fatechand Chaturbhujdas vs. State of Maharashtra (S.A.894 of 1990 dated.12-8-1991) (M.S.T. Tribunal), M/s.Duvent Fans P. Ltd. vs. State of Tamil Nadu (113 STC 431)(Mad.) and M/s. G. A. Galiakotwala & Co. (37 STC 536) (SC).

However, a controversy developed after the judgment of Hon. Supreme Court in case of A & G Projects & Technologies (19 VST 239)(SC).

Issue in A & G Projects & Technologies (19 VST 239) (SC)

The issue before the Supreme Court was from the judgment of Karnataka High Court. The accepted position in the Karnataka High Court judgment was that the Karnataka Sales Tax Assessing Authority considered the sale of A & G Projects as effected under section 3(a) of the CST Act in Tamil Nadu. Inspite of holding so, the tax was levied in Karnataka under CST Act. Before the Supreme Court the issue was whether tax can be levied in Karnataka inspite of holding the transaction as covered by section 3(a) in Tamil Nadu? In effect, the Supreme Court considered the application of section 9(1) of the CST Act. There was no issue about interpretation of section 6(2) of CST Act which is about “sale by transfer of documents of title to goods”, also popularly known as “in transit sale”. However, Hon. Supreme Court has made certain observations in the above judgment regarding “In transit sale”, because of which there was confusion. The relevant observations can be reproduced as under for ready reference:

“Within section 3(b) fall sales in which property in the goods passes during the movement of the goods from one State to another by transfer of documents of title thereto whereas section 3(a) covers sales, other than those included in clause (b), in which the movement of goods from one State to another is under the contract of sale and property in the goods passes in either States [SEE: Tata Iron & Steel Co. Ltd. vs. S.R. Sarkar – (1960) 11 STC 655 (SC) at page 667]. The dividing line between sales or purchases u/s. 3(a) and those falling u/s. 3(b) is that in the former case the movement is under the contract whereas in the latter case the contract comes into existence only after the commencement and before termination of the inter-State movement of the goods.” (Underlining ours)

Due to the above observations the sales tax authorities were taking a view that if the customer to whom sale by transfer of documents is to be effected was known prior to movement then it will be a pre determined sale and will not fall in the exempted category of section 6(2) of CST Act. This created a number of difficulties for the trading community.

Recent judgment of Hon. M. S. T. Tribunal in case of Ajay Trading Company (S A No.111 of 2010 dated12- 12-2012).

Facts of this case

The appellant is a trader and reseller of machinery in Maharashtra. The outside state buyers, herein after referred to as ‘ultimate buyers’ placed an order for purchase of machinery from the appellant. The ultimate buyers were from the state of Gujarat and Rajasthan. The appellant, in turn placed order on local manufacturers in Maharashtra for manufacture of those machineries. The appellant has instructed the manufacturers to dispatch the goods to the ultimate buyers. As per the instructions of the appellant, the manufacturers manufactured the machineries and dispatched them to the ultimate buyers in respective states. The invoices, delivery Challan and the lorry receipts i.e. dispatch proof was sent to the appellant. The appellant signed the lorry receipts and delivered the same to the ultimate buyers. In invoice, the local manufacturer levied CST @ 4%. The appellant raised invoice on the ultimate buyers without levying CST. Turnover of such sales to the tune of Rs. 58,26,750/- was claimed by the appellant in his returns for the period 2005-06 as a subsequent sale u/s. 6(2) of CST Act, as such exempted from central sales tax.

The appellant issued C form to the local manufacturers, who in turn issued an E1 form to the appellant. The ultimate buyers, on receiving the machinery, issued ‘C’ form to the appellant

The assessing officer assessed the appellant for the year 2005-06 and disallowed the claim of subsequent sale u/s. 6(2) holding that both the sales were interstate sales u/s. 3(a) of the CST Act. According to him, property in the machineries was transferred to the outside buyers before the movement of machineries outside the state. As such there is no subsequent sale u/s 6(2) by transfer of documents of the title. Hence, the turnover of the subsequent sale claimed by the appellant was held as not exempt. He levied sales tax on the same, considering it as sales u/s 3(a), on the basis of the decision of the Karnataka High Court in case of State of Karnataka vs. M/s A & G Projects and Technologies Ltd (13 VST 177) and Supreme Court in case of A & G Projects & Technologies vs. State of Karnataka (19 VST 239)(SC).

Arguments

The appellant contended that the local manufacturers have moved the machinery outside the state of Maharashtra as per the instructions of the appellant and sent the dispatch proof i.e. lorry receipt along with the invoice to the appellant. He submitted that the appellant signed the lorry receipts and delivered it to the ultimate buyers. He submitted that the first sale is an interstate sale u/s. 3(a) of the CST Act, and the sale by the appellant to the ultimate buyer is effected by the transfer of documents of title to goods during interstate movement and it is a subsequent sale u/s 3(b) r.w.s 6(2) of CST Act and as such it is exempted from central sales tax. It was submitted that both the authorities below committed an error in relying on the decision of Karnataka High Court and Supreme Court in case of M/s A & G Projects and Technologies Ltd. (cited supra).

Judgment

The Tribunal held that the facts of the present case are similar to the cases of Bayyana Bhimayya & Sukhdevi Rathi vs. Govt. of A.P. (12 STC 147), Onkaral Nandlal vs. State of Rajasthan (60 STC 314) and Haridas Mulji Thakker vs. State of Gujarat (84 STC 319).

The Tribunal observed that the appellant agreed to supply future goods to ultimate buyers outside the state. Delivery to them was on a future date. The appellant in turn placed an order on local manufacturers to manufacture those goods as required by the ultimate buyers and incorporated the term of delivery in the contract to deliver the goods to its ultimate purchasers on its behalf. The local manufacturer manufactured the goods and delivered the goods to the transporter for delivery to ultimate buyers. The local manufacturers moved the goods outside the state of Maharashtra. The contract of sale among them and appellant occasioned the movement of goods outside the state of Maharashtra. It fulfills the requirement of section 3(a) of CST Act and section 3(a) is attracted.

The Tribunal further observed that the law permits two sales simultaneously. Referring to Omkarlal Nandlal’s case Tribunal observed that the same sale may be both a sale in course of inter-state trade or commerce u/s. 3 of CST Act as also a sale inside state. Applying these observations to the facts of the present case, the sale among the local manufacturer and appellant was held as first inter state sale u/s. 3(a) of CST Act, and not a local sale. The subsequent sale by appellant to the ultimate buyer was held as exempt u/s.6(2) r.w.s. 3(b) of CST Act, 1956.

Conclusion

From above judgment the theory of subsequent exempted sale gets reiterated and also shows that A & G Projects judgment has not made any difference in interpretation of section 6(2) of CST Act. It is also expected that the assumed theory of predetermined sale will also get settled now and the trade community will have sigh of relief.

Nirav Shah

Nature of Lease Transaction vis-à-vis Intangible Goods

Introduction
Transfer of right to use any goods for any purpose’ (Lease) is deemed to be a sale and liable to tax under VAT/CST Acts. Nature of lease transaction is not defined under Constitution of India or under Sales Tax Laws. Thus, the nature is required to be ascertained in light of judicial pronouncements. A few important judgments in relation to above issue can be noted as under:

Dukes & Sons (112 STC 370)(Bom)
This is one of the earliest cases dealing with nature of lease transaction vis-à-vis intangible goods. In this case, the issue before Bombay High Court was about tax on royalty amount 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 capable of being given for use to more than one party, there is no lease transaction. The requirement of exclusive use or exclusive possession to transferee was emphasised 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.

Bharat Sanchar Nigam Ltd. (145 STC 91)(SC)
This is the latest case in the series from Hon. Supreme Court. This is a Larger Bench judgment. The issue in this case was about levy of lease tax on services provided by Telephone Companies. Supreme Court held that no such tax is leviable as the transaction pertains to service. While holding so, one of the learned judges on the Bench observed as under in para 98 of the judgment about 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 licenses required therefore should be available to the transferee;

d. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statute – viz. a “transfer of the right to use” and not merely a licence to use the goods;

e. Having transferred the right to use the goods, during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”

Thus the nature of lease transaction is required to be decided in light of above parameters.

Smokin Joe’s Pizza Pvt. Ltd. (A.25 of 2004 dt. 25-11-2008)

The facts in this case were that the dealer was holding registered Trade mark “Smokin Joes” and allowed its use to its franchisees. The franchise agreement provided for non exclusive right to use the registered Trade mark. The agreement also provided for providing various services to Franchisee. Lower authorities held the transaction as taxable lease transaction. Tribunal made reference to judgments in case of Gujarat Bottling Co. Ltd. (AIR 1995 Supreme Court 2372) and Bharat Sanchar Nigam Ltd. (145 STC 91) and came to the conclusion that in the given circumstances the transaction of franchise of trademark is not lease transaction but amounts to licensing transaction. At a time more than one franchise agreement can be entered into in respect of same trademark. Hence, it is a licence transaction and not lease. Therefore, Tribunal has held that no tax is payable on above transaction under Sales Tax Law. In this case Hon. Tribunal, though it referred to the Bombay High Court’s judgment in case of Dukes and Sons, in light of judgment of Hon. Supreme Court in BSNL held that the transaction is not lease transaction.

Subsequent to the above judgment there is also a judgment of Hon. Andhra Pradesh High Court in case of Nutrine Confectionery Co. Pvt. Ltd. vs. State of Andhra Pradesh (40 VST 327)(A.P). In this case, the transaction was for allowing use of trade mark. The said use was also on non exclusive basis. Still Hon. High Court has held that the transaction is lease transaction. Hon. High Court felt that the judgment of BSNL about exclusive use could not apply in relation to intangible goods like trade mark.

Malabar Gold Pvt. Ltd. vs. Commercial Tax Officer, Kozhikode (2013-VIL-49-KER-ST dt.24.6.2013).

This is the latest judgment of Kerala High Court. In this case, the transaction was about granting of franchise right on non exclusive basis. Hon. High Court has held that when the grant of franchise is non exclusive it is not lease transaction and not liable to VAT. In this judgment Hon. Kerala High Court has distinguished the judgment of Hon. Andhra Pradesh High Court in above case of Nutrine Confectionery Co. Pvt. Ltd. on the ground of difference in terms of agreement. Hon. Kerala High Court has also referred to Supreme Court judgments about non attraction of Service tax and VAT on same transaction. The observations of the Hon. High Court are as under:

“44. The issue therefore can be considered in the light of the dictum laid down in BSNL’s case (supra). Herein, the term ‘franchise is included in Section 65(105)(zze) of the Finance Act. The same is a taxable service and the taxable event is the service rendered by the Company. Thus, any service provided or to be provided to a franchisee will come within the purview of the said provision. The meaning of the terms franchise and franchisor u/s. 65(47) and (48) are also important. Going by the definition of franchise, it is an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified with franchisor, whether or not a trade mark, service mark, trade name or logo or any such symbol, as the case may be, is involved. The terms of the agreement herein will show that Clause II of the Preamble has specifically given under items (i) to (v) the activities to be carried out by the franchisee which are as follows:

“i. Retailing of gold ornaments

ii. Retailing of diamond and other precious stone ornaments.

iii. Retailing of premium watches.

iv. Retailing of platinum and other premium fashion accessories.

v. Any other items introduced by MALABAR GOLD in future.”

Clause 2 under the heading “Products” will show that the franchisee cannot stock, exhibit or sell any products in the authorised showroom during the period of the agreement except the products authorised by Malabar Gold, which may include products manufactured or sourced by Malabar Gold. Therefore, the same will definitely satisfy the meaning of ‘franchise’ as contained in section 65(47) of the Finance Act, 1994. The learned Special Government Pleader for Taxes referred to the agreement herein and said that no service is referred to in the clauses therein.

We do not agree, in the light of clauses 3, 4 and 5 of the model agreement as already noticed.

Since what is termed as ‘taxable service’ is any service to be provided to a franchisee by a franchisor in relation to a franchise, the terms of the agreement will have to be understood in that context.

45. In the light of the principles stated in para 98 of the judgment in BSNL’s case (supra), the provisions of the agreement, especially clauses (3) and (5) will show that the franchisor retains the right, effective control and possession and it is not a case of transfer of possession to the exclusion of the transferor. We notice that under clause (12) the franchisee has no right to sub-let or sub-lease or in any way sell, transfer, discharge or distribute or delegate or assign the rights under the agreement in favour of any third party, which is also significant. On termination of the agreement also, going by clause 25.3, the franchisee shall forfeit all rights and privileges conferred on them by the agreement and the franchisee will not be entitled to use the trade name or materi-als of “Malabar Gold”. Merely because, going by clause 18, the franchisee is not an agent, it will not get any other exclusive right.

46. Since this Court in the two judgments relied upon by the learned Special Government Pleader, viz. Jojo Frozen Foods (P) Ltd.’s case {(2009) 24 VST 327} and Kreem Foods (Pvt.) Ltd.’s case {(2009) 24 VST 333} had no occasion to consider Entry 97 and the provisions u/s. 65(105)(zze) of the Finance Act and the definition of franchise and franchisor u/s. 65(47) (48) of the Finance Act, and those judgments related to transactions of pre 2003 period, we are of the view that the same are distinguishable on the facts of this case.

The judgment in Mechanical Assembly Systems (India) Pvt. Ltd.’s case (supra), as we have already explained, is a case of exclusive transfer of know-how.

47. One of the judgments relied upon by the learned Special Government Pleader for Taxes is that of the Andhra Pradesh High Court in Nutrine Confectionary Co. Pvt. Ltd. vs. State of Andhra Pradesh {(2012) 20 KTR 38}. Therein, the transaction involved is by way of an agreement between the petitioner company and the assignee companies and a royalty of Rs.500/- per ton of production by the assignee, has been granted to the petitioner company for the use of trademark and logo for the goods. The matter was considered u/s. 2(h) of the Andhra Pradesh General Sales Tax Act, 1957. The Bench was of the view, after going through the terms of the agreement, that “the assignee is free to make use of the trademark and logo. The petitioner does not in any manner regulate the use of trademark or logo although, “keeping in view the facilities available with the assignee, the petitioner undertook to suggest suitable terms provide formulas and recipes and suggest locations for marketing.” After analysing the agreement therein, it was held that the consideration received as royalty, is taxable u/s. 5E of the Andhra Pradesh General Sales Tax Act. We have already analysed the terms of the agreement herein. Even though learned Special Government Pleader for Taxes placed heavy reliance on the judgment in Nutrine Confectionery Co. Pvt. Ltd.’s case (supra), we are of the view that the same is distinguishable on the facts of the said case and in the light of the provision u/s. 5E of the Andhra Pradesh General Sales Tax Act also.

48. Therefore, even though both sides relied upon the provisions of Articles 246 and 254 of the Constitution of India, we need not enter into a finding on the said question, as we are of the view that the tests laid down in BSNL’s case (supra) are squarely applicable here. Herein, it cannot be said that there are goods deliverable at any stage which is the test laid down by the Apex Court in paragraphs 78 and 79 of BSNL’s case (supra) and for that reason also, there is no transfer of right to user at all. Coupled with the same, is the fact that during the period in question the franchisee is having the right, it is not to the exclusion of the franchisor and as it is seen that even during the period during which the transaction is going on, the franchisor can again transfer the right to others, the tests laid down in sub paragraphs (d) and (e) under para 97 of BSNL’s case (supra) are not satisfied.”

Thus the position about nature of lease transaction vis-à -vis intangible goods can be said to be fluid and more light needs to be thrown by the Bombay High Court so far as Maharashtra State is concerned. However, from overall discussion it can be said that the latest judgment of Kerala High Court in Malabar Gold Pvt. Ltd. has interpreted the legal position from various angles which can be considered as guiding judgment.

Nirav Shah

Appeal against revision order under BST Act, 1959 — Maintainable — M.S.T. Tribunal

VAT

A big controversy had arisen about maintainability of appeal
against revision order u/s.55 of the Bombay Sales Tax Act, 1959.

S. 55 of the BST Act, which contains provisions about
appeals, reads as under :

“(1) An appeal, from every original order, not being an
order mentioned in S. 56 passed under this Act or the rules made thereunder,
shall lie :

(a) if the order is made by the Sales Tax Officer, or any
other officer subordinate thereto, to the Assistant Commissioner;

(b) if the order is made by an Assistant Commissioner, to
the Commissioner;”

The revision order is passed by a superior authority u/s.57
of the BST Act, 1959. The said revision power is in the nature of supervision
power and the superior authority is entitled to call for records of order passed
by his subordinate authority and then to pass revision order as he may think
just and proper. Since commencement of the BST Act, 1959, such revision orders
were considered to be original orders for the purposes of S. 55 and appeal was
used to be maintained against the same, without any dispute.

However on 6-6-2006, the Bombay High Court, Nagpur Bench,
passed judgment in the case of Shiv Shyam Sales Enterprise. The said judgment
was in writ petition filed by the petitioner against the revision order passed
in his case. The argument of the Department was that the writ petition is not
maintainable as there is alternative remedy by way of appeal against the
revision order as per S. 55 of the BST Act, 1959. The High Court rejected this
prayer by making observations in para 6 as under :

“6. Perusal of S. 55 of the Bombay Sales Tax Act reveals
that it provides remedy of appeal from every original order. The orders
impugned in the present petition by the petitioner are passed in exercise of
revisional jurisdiction u/s.57 of the said Act, and therefore are not the
Original orders. It is therefore apparent that remedy of filing an appeal
u/s.55 is not available to the present petitioner. In such circumstances the
argument of alternative remedy holds no water. In any case the point as sought
to be raised ought to have been taken at the time of initial hearing when the
writ petition was entertained in the year 1989. In view of the law settled on
the point, such an argument cannot be allowed to be raised at the stage of
final hearing after expiry of long period. We therefore, find no merits in the
preliminary objection raised by the respondents.”

Based on the above observations, the authorities at the Sales
Tax Department felt that no appeal is maintainable against the revision order.
Thus, all the appeals against revision orders are kept pending by the Department
appellate authorities as well as by the Tribunal. The dealer community expected
that the Government would amend the law suitably on its own to mitigate the
hardships to dealers due to the above judgment. However, finding that no such
amendment is forthcoming, the matter was argued on the point of maintainability
before the Tribunal. The M.S.T. Tribunal has now decided this issue vide its
judgment in the case of Schenectady Beck (India) Ltd. (A. No. 98 & 99 of 2007)
and Others, dated 6-11-2009.

The Tribunal considered the issue from various angles.
Tribunal referred to the background of appeal provisions. The Tribunal also
referred to various judicial pronouncements about the binding nature of judgment
of jurisdictional Court as well as cases of mere observations, without binding
nature.

In particular, the Tribunal referred to judgments of the
Bombay High Court in cases of Swastik Oil Mills v. Mr. H. B. Munshi, (21
STC 383) and Mr. H. B. Munshi v. The Oriental Rubber Industries Pvt. Ltd.
(34 STC 113), wherein it is observed that the revision is fresh proceedings and
this judgment is confirmed by the Hon. Supreme Court as reported in 21 STC 394.
The Department tried to counter the situation relying upon the above
observations by the Bombay High Court in para 6 (reproduce above) and further
emphasised that the judgment being of the Bombay High Court cannot be brushed
aside, but has to be followed.

The Tribunal, however, after elaborate discussion and giving
sound reasoning, held that the above judgment of the Bombay High Court in Shiv
Shyam Sales Enterprise does not decide anything contrary to settled scheme of
the BST Act. The Tribunal summed up its observations in para 32, as under :

“32. To sum up, the two-line observation in the case of
M/s. Shiv Shyam Sales Enterprises (supra), which has given rise to the
present dispute is made without being apprised of the well-settled legal
position as laid down by the past judicial authorities including the Hon’ble
Bombay High Court’s judgments in the cases like M/s. Swastik Oil Mills (supra).
In these circumstances, we respectfully prefer to be bound by these past
authorities rather than by the said two-line observation in the case of M/s.
Shiv Shyam Sales Enterprises (supra). We have also traced the origin of
the words ‘original orders’ in S. 55(1). The origin thereof is found in the
departure on 1-1-1960 from a ‘single appeal’ as obtaining in the 1953 Act to
‘two appeals’ as introduced in the Bombay Act. While providing the ‘two
appeals’ the Legislature has described all the orders other than the appeal
orders to be ‘original orders’ and has provided appeals thereagainst
u/s.55(1), if they are not specified as ‘non-appealable orders’ in S. 56. The
suo motu revision orders u/s.57 are neither specified in the list of
non-appealable order u/s.56, nor are they orders passed in appeals. In view of
this position, the revision orders are ‘original orders’ for the purposes of
S. 55 and hence appeals thereagainst lie u/s. 55(1).”

Accordingly, the Tribunal held that the revision in the
original order for S. 55 and appeal is maintainable against the same. The
judgment has given a much required relief to dealers/litigants in Maharashtra
and will go a long way to preserve one of the fundamental rights of dealer.

[Schenectady Beck (India) Ltd. (S.A. No. 98 & 99 of
2007) & Others, dated 6-11-2009]

Date of effect for registration in case of Amalgamation of Companies :

An interesting issue arose before the Bombay High Court in relation to the date of effect of registration. The facts are that transferor company amalgamated with transferee company vide an order of the Bombay High Court, dated 24-7-2003, under the Companies Act, 1956, in which the scheme of amalgamation was approved. As per the amalgamation scheme, the amalgamation was to be effective from 1-4-2002. The transferee company was not registered under BST Act, 1959, hence, applied for new registration on 19-8-2003. The transferee company requested to grant Registration Certificate effective from 1-4-2002. However, the registration authority considered the change in the Constitution from 1-4-2002 and finding that there is delay in making application (in case of change in the Constitution the application for new registration is required to be made within sixty days), granted R’C. effective from 19-8-2003 i.e., the date of application. The mean period from 1-4-2002 to 18-8-2003 became unregistered period. The prayer of the petitioner to grant administrative relief for giving retrospective effect to R. C. from 1-4-2002 was also rejected.

Hence the writ petition was filed in the Bombay High Court, The High Court analysed the situation and amongst others, observed that in case of retrspective effect to amalgamation, the party cannot be expected to apply within sixty days from such retrospective date. The 60 days’ time should be considered from the date of order of amalgamation by the High Court and if so applied within 60 days, then the registration should be granted from the effective date of amalgamation i.e., in this case from 1-4-2002. The High Court observed as under about this aspect :

“12. It is in these circumstances that this Court must consider the date for the purpose of moving an application and the starting point of limitation under Rule 7(1)(a-1). As earlier noted insofar as amalgamating company Floatglass India Limited, is concerned, considering the provisions, its certificate of registration was cancelled from 1-4-2002. In other words, M/s. Floatglass India Limited ceases to be company from that date and that must be the date to give effect to S. 19(6) and Rule 7(1)(a-1). There is therefore, an omission on account of the failure by the delegates to provide a corresponding rule to Rule 7(1)(a-1). In the absence of the Legislature providing and taking note of the fact that in such cases, the amalgamating company is not at fault, it will have to be construed that the time for making an application for registration will be 60 days from the date of the Court passing the order. On such application being made, the certificate of registration will have to be made effective from the anterior date given by the Company Court. This is only a procedural requirement. This would avoid hardship and give true effect to the mandate of the Legislature both under the BST and CST Act. No order of a Court should visit a party with liabilities and or undesirable conse-quences in the matter of tax. The rule must be so read to give effect to the legislative mandate. The date for applying for registration u/s.19(6) for a company, can only be the date of the Company Court’s order. If within 60 days of such order an application is made, then the expression succession to business in Rule 7(1)(1a)will also be so read. Under Rule 8(8)(a)(iii) then it will be the date the Company Court has ordered or the date provided in the scheme which will be the date of succession to business. This would obviate any difficulty to a party till such time the delegate makes a specific provision in Rule 8.”

[Asahi India Glass Ltd. v. State of Maharashtra, (25 VST 31)(Bom.)]

Nirav Shah

Recent amendments to MVAT Rules

Nirav Shah

New Composition Scheme for Builders/Developers under MVAT Act, 2002

VAT

The Finance Minister of Maharashtra, in his budget speech,
stated that he proposes to announce a Composition Scheme for Builders/Developers
for discharging their tax liability under the MVAT Act, 2002.

U/s.42 of the MVAT Act, 2002 the State Government has power
to prescribe compositions scheme/s for different classes of dealers or for
different types of transactions. There are several schemes for discharge of tax
liability on works contracts, like 5% Composition Scheme, 8% Composition Scheme,
etc. Now, this is a special scheme announced for builders/developers.
Accordingly, the enabling provision is made in the MVAT Act, 2002 by insertion
of S. 42(3A) vide amendment effected in April, 2010. Under the said enabling
power, the State Government has notified a Composition Scheme vide Gazette
Notification dated 9-7-2010.

Before we discuss certain aspects of the said new Composition
Scheme, it may be useful to discuss relevant legal background briefly.

In case of builders, whether there is works contract sale or
sale of immovable property has become a debatable issue. When the builder sells
ready flat i.e., after the flats are constructed, it will amount to sale
of immovable property and there is no question of VAT liability.

The other possibility is that the builder enters into an
agreement for sale of flat with the prospective buyer when the construction is
under progress. Such agreements are referred to as ‘Under Construction
Contracts/Agreements’. Till the judgment of the Supreme Court in the case of
K. Raheja Construction (141 STC 298) (SC), such contracts were considered to
be for sale of immovable property and the Sales Tax Department did not
contemplate any levy on the same. However, after the above judgment a debatable
position arose, which continues as on this day. A view prevails that such under
construction contracts are a works contract transaction. However, the other view
is that such a transaction is basically a transaction for sale of immovable
property, thus, there is no question of works contract and sales tax (VAT)
thereon.

But, the Government of Maharashtra and Sales Tax Department
hold a view that the above mentioned judgment is applicable in all cases, hence,
will cover all ‘under construction agreements’ for flats/premises. Under the
said impression the Commissioner of Sales Tax issued Trade Circular, viz.
Circular No. 12T of 2007, dated 7-2-2007. Similarly, the Government has
also introduced definition of ‘Works Contract’ in the MVAT Act so as to bring
the position of the said definition at par with the definition as was under
consideration before the Supreme Court in the abovestated judgment.

However, in spite of the abovementioned changes and judgment
of the Supreme Court, in most of the cases, it is possible to contend that
‘under construction contracts’ are not covered under the Sales Tax Laws and they
are not liable to tax under the MVAT Act, 2002 as works contract.

Amongst others, the facts of K. Raheja are required to be
seen carefully. In that case the value for undivided share in land was shown
separately and cost of construction was shown separately. However, when such is
not the position i.e., when the cost of land and construction is not
shown separately, then such contract cannot be made liable. There is no enabling
power with the State Government to bifurcate the composite value into land and
construction. Accordingly, if such under construction agreements are considered
to be for sale of immoveable property, they cannot be taxed under Sales Tax
Laws.

Be as it may, the Government of Maharashtra, in its wisdom
continues with its understanding that ‘under construction contracts’ are liable
to tax, and therefore, the Government has provided for one more Composition
Scheme specifically for builders/developers. The salient features of this new
scheme are as under :

(a) The scheme applies to builders/developers who undertake
the construction of flats, etc., wherein they also transfer land or interest
underlying the land.

Normally, builders/developers commence construction on their
own land as per their own project planning. The land is to be transferred to the
society or association which may be formed by the buyers of the premises
collectively, after possession is given. An issue may arise that there will not
be transfer of land or interest in land to any individual purchaser with whom
agreements are entered into. In case of flats/premises, each sale agreement can
be considered to be construction contract. Therefore, if one reads the
Notification literally, then it may be said that when the land or interest in
land is not transferred to the very individual purchaser, the Notification
cannot apply. Therefore, to avoid any dispute in future, it would be necessary
for the Department to clarify about the nature of transfer of land or interest
in land.

(b) The scheme shall apply to registered dealers only.

It is possible that in view of debatable position, the
builders/developers are not registered under the MVAT Act, 2002. However, if
they wish to take benefit of this scheme at this moment or any time in future,
it is necessary that they remain registered dealer. However, being registered
doesn’t mean that the builder is accepting the liability. He can be registered
dealer but can still show no turnover in the returns, considering his contracts
as contracts for immovable property. In future, if the liability accrues because
of clarity in the legal position, he can opt for this scheme. Though one of the
conditions mentions that the dealer should include the contract price in the
return in which the agreement is registered and pay the tax on it by declaring
such contract price as turnover, this can be done even by revising the return at
appropriate time. Therefore, at present, awaiting clarity of the law, the
builders may opt to file return without declaring turnover of such contracts.

It may also be noted that if the builder applies today for
registration, his earlier transactions from
20-6-2006 onwards may also be scrutinised for levy of liability, if any. This
new Composition Scheme does not bring new tax but it only provides one more
method for discharging liability effective from 1-4-2010. Assuming that a
builder opts for this Composition Scheme from 1-4-2010, he can contest the
liability for past period, if the issue arises.

(c) The scheme is applicable to agreements registered on or
after 1-4-2010. Therefore, even if the agreement is executed earlier, but
registered on or after 1-4-2010, it will be eligible for composition scheme.

(d) The composition money is 1% of the agreement amount,
specified in the agreement or value adopted for the purpose of stamp duty,
whichever is higher.

(e) The dealer/s opting for this Composition Scheme shall not be eligible to claim set-off of taxes paid on purchases.

(f) The dealer/s opting for this Composition Scheme shall not be eligible to effect any purchases against ‘C’ Forms.

(g) The dealer/s opting for this Composition Scheme shall not issue Form No. 409 to the sub-contractors in respect of the works contract/s in respect of which composition is opted.

(h) A further condition is that the dealer will not be entitled to change the method of computation of tax liability. (From a plain reading, it appears that this condition is to be seen qua each contract and not the project as a whole.)

(i) The last condition mentioned is that the dealer under this Composition Scheme should not issue tax invoice. (The issue may arise as to whether the builder can collect 1% composition separately. Though, the provisions relating to tax invoice are not worded happily, from the clarification issued by the Commissioner of Sales Tax, it can be said that though tax invoice cannot be issued, still in the normal invoice or bill, etc., the builder can charge composition amount separately. Otherwise he has to include the same in the agreement price.)

From the overall scenario, it appears that though there is uncertainty about attraction of sales tax liability on ‘under construction contracts’, the builders/developers may consider the risk factor and decide accordingly. The passing on the burden to the prospective purchasers will result in burden upon the common person. The issue will be more aggravating if ultimately the liability is not upheld by the judicial forum. There will be a number of difficulties in getting back the tax which was not due to the Government.

The earliest clarification of legal position is the need of the day.

Nirav Shah

Recent amendments under MVAT Act and Rules

Nirav Shah

Some important judgments

VAT

Interstate sales — Dispatch Proof

Swastik Plastics, S.A. 257 and 258 of 2005

dated 29-3-2006 :

The issue in this case was about disallowance of claim of
interstate sale, as dispatch proof was not available. Before the Maharashtra
Sales Tax Tribunal the appellant produced copy of orders, delivery challans,
sales bills, etc. and ‘C’ forms received from purchasers. It was then contended
that it is not the requirement of law that the goods must be dispatched by
public transport. They can even be transported in own vehicle, etc. The
appellant in this respect relied upon judgments in the case of Nivea Times, (108
STC 6) and Pure Beverages Ltd., (142 STC 522). The Revenue Department submitted
that since no dispatch proof was produced, it is to be held as local sale.

The Tribunal held that the averment made by the Revenue
Department that there is no interstate movement is to be proved by the
Department. Except lack of dispatch proof, the Department has not proved
anything contrary to say that it is not an interstate sale. The Tribunal held
that the burden is on the Department to prove the same. The Tribunal also
considered the evidence produced by the appellant including ‘C’ forms. The
Tribunal also held that passing of property in any particular State is not
decisive. The Tribunal allowed claim of interstate sale.

Commissioner of Sales Tax v. Pure Beverages Ltd., (142 STC 522)
(Guj.) :

In this case, no dispatch proof for interstate movement was
available, and hence, claim of interstate sale was disallowed. However,
circumstantial evidence was available. The Gujarat High Court held that the
claim is allowable and observed as under :

“19. In the present case, therefore, the assessee had
claimed that the transactions in question were governed by S. 3(a) of the
Central Act, that it was liable to be charged with tax under the said
provision, but the Department disputed the said averment. The contention of
the Department that the assessee ought to have procured evidence in the form
of endorsement of the authorities at the check-post or delivery memo issued by
the transporter or octroi receipts showing payment of octroi by the purchaser
at the destination, etc., proceeds on the presumption that there is no
movement of goods and discards the version of the assessee that both the sale
and the movement of goods are part of the same transaction and there is a
conceivable link between the sale and the movement of goods. In other words,
the Revenue would like the Court to raise a presumption that the purchaser
must have diverted the goods after having taken delivery of the same at the
factory gate. Not only does the Revenue fail in discharging the onus which is
on it, but the presumption that it wants to draw is far-fetched in absence of
any evidence to show that such an exercise had been undertaken by the
purchaser. The assessee herein, namely, the selling dealer had submitted ‘C’
forms. It was open to the Department to verify the genuineness of the
transaction; call upon the purchasers, who are registered dealers, and seek
evidence to satisfy itself as to whether the goods had in fact moved or not
from this State to State of Rajasthan. The Department does not undertake the
requisite exercise, ignores the evidence produced by the assessee and merely
presumes a state of affairs not warranted in law or on facts. “Before the
Department rejects such evidence, it must either show an inherent weakness in
the explanation or rebut it by putting to the assessee some information or
evidence which it has in its possession. The Department cannot by merely
rejecting unreasonably a good explanation, convert good proof into a no
proof.”

In the light of above legal position, it can be said that
even if direct dispatch proof like receipt from public transport is not
available, still if other circumstances are brought before the sales tax
authorities, the claim has to be allowed.

Sale price — Free supplies

Ghatge Patil Ind. Ltd. & Others, S.A. 320 to 327 of 2002 dated 30-3-2007

The facts of the case, relating to year 1994-95 and others,
are that the appellant received an order for supply of certain manufactured
parts. The buyer gave certain parts as free issue to be incorporated in the
manufactured goods. In purchase order, there was no term about and particular
price to be considered for the said free issues. In his sale bill the appellant
added the cost of such free issues in his price to calculate excise duty. The
cost so added was then given deduction. On the above facts, the lower
authorities considered the cost of such supplies as part of sale price and
levied tax on the same. Before the Tribunal, appellant explained the facts. The
Tribunal observed that in this case the supplies are not made with any
particular consideration. There was no intention on the part of buyer or seller
to sale/purchase above goods nor agreed for any consideration. Therefore there
cannot be sale from the appellant to the buyer. The addition in price was with
sole purpose of calculating duty, as it was attracted even on free supply cost,
as per Excise laws. The Tribunal distinguished the judgment in the case of N. M.
Goyal (72 STC 368) on the above facts. The Tribunal made reference to judgment
in the cases of Gannon Dunkerley & Co. (9 STC 353), Indian Coffee & Tea
Distributors Co. (6 STC 47), Indian Alluminium Cables (115 STC 161), Hindustan
Aeronautics Ltd. (55 STC 314) and Auto Comp Corpn. (S.A. 1083 of 99, dated
26-9-2003). The Tribunal directed to delete the addition.

Binding effect of Tribunal judgment

Trinity Engineers Ltd., Misc. Appl. 218 and 219 of 2007

Vide S.A. 359 and 360 of 2000, dated 5-4-2006, the
Maharashtra Sales Tax Tribunal directed that the turnover in respect of forgings
is to be taxed @ 4% under Entry B-6. The First Appellate Authority did not pass
consequential order on the ground that the Commissioner of Sales Tax has
preferred reference application. Therefore, this miscellaneous application was
filed before the Tribunal by the appellant. The Tribunal held that action of the
said authority in not passing order for long time in direct judgment of the
Tribunal is unjustified and showed its displeasure. The Tribunal observed as
under :

“We entirely agree with Shri Surte, the learned counsel for the appellant that the First Appellate Authority was duty-bound to give effect to the judgment of the Tribunal. Making reference in the High Court cannot be a reason for not complying with the orders of the Tribunal, unless the stay has been granted by the High Court. Such instances of non-compliance of the orders of the Tribunal not giving effect to the judgment of the Tribunal and avoiding to make the refund are repeatedly noticed by the Tribunal. It is not expected that the legitimate taxpayer after obtaining orders approaching the statutory forum for granting necessary relief should be compelled again to knock the doors of the Tribunal for redressal of the same grievances. The refund which is due in accordance with law, cannot be withheld unless procedure prescribed under the Act has been followed. We express our strong displeasure for such conduct of not giving effect to the judgment of the Tribunal without any reasons and without following the due procedure of law. It is observed that the learned Commissioner of Sales Tax should make a serious note of such things and may pass appropriate orders. With this, the miscellaneous applications are disposed of with the following directions:

The assessing officer is directed to give effect, of the judgment of the Tribunal in Second Appeal Nos. 359 and 360 of 2000 immediately without fail.”

It is felt that the above observations of the Tribunal will be seriously followed by the lower authorities in other cases also.

Profession Tax – Extent of liability

Kamataka Bank Ltd. v. State of A.P. and Others CR. Yegnaiah & Sons. v. Profession Tax Officer and Another (12 VST 459) (SC):

The issue in this case was about levy of Profession-Tax. The AP. Profession Tax Act sought to levy Profession Tax on each branch of the same person (entity). This was resisted on the ground that as per the Constitution, there is limit of Rs.2,500 per person for levy of Profession Tax by the States. It was argued that this limit is per person in the State and hence induding all branches, the Profession Tax on one person cannot exceed more than Rs.2,500. The argument was that levy of Profession Tax @ 2,500 on its each branch is far in excess of statewise limit of Rs.2500 per person. In short, the argument was that tax is leviable on it at maximum Rs.2,500. Therefore, the specific provision under AP. Profession Tax Act viz. definition of ‘person’ which sought to define each branch as person was challenged as un-constitutional. The short gist of the Supreme Court judgment is as under:

The Supreme Court observed that the definition of the word ‘person’ in the Explanation to S. 2(j) of the Andhra Pradesh Tax on Professions, Trades, Callings and Employments Act, 1987, and also Explanation No. 1 of the First Schedule to the Act is not intended to tax a person at a rate higher than Rs.2,SOOper annum, per person, but to treat even a branch of a firm, company, corporation or other corporate body, any society, club or association as a separate person, and therefore, a separate assessee within the meaning of S. 2(b) of the Act and the Andhra Pradesh State Legislature has undoubtedly the competency to adopt such a devise of taxation. The Andhra Pradesh State Legislature did not violate the mandate of Article 276(2) of the Constitution of India in so defining the word ‘person’. It is further observed that the definition of ‘person’ in General Clauses Act, would not restrict the power of the State Legislature to define a ‘person’ and adopt a meaning different from or in excess of the ordinary acceptance of the word as is defined in the General Clauses Act.

On the aspect of constitutional validity, the Supreme Court observed that there is always a presumption in favour of constitutionality, and a law will not be declared unconstitutional unless the case is so clear as to be free from doubt; lito doubt the constitutionality of a law, is to resolve it in favour of its validity. II Where the validity of a statute is questioned, and there are two interpretations, one of which would make the law valid and the other void, the former must be preferred and the validity of law upheld, observed the Supreme Court. It is further observed that in pronouncing on the constitutional validity of a statute, the Court is not concerned with the wisdom or un-wisdom, the justice or injustice of the law. If that which is passed into law is within the scope of the power conferred on a Legislature and violates no restrictions on that power, the law must be upheld whatever a Court may think of it, held the Supreme Court.

In respect of argument on unconstitutionality in the light of Article 14, the Supreme Court held that no legislation can be declared to be illegal, much less unconstitutional on the ground of being unreasonable or harsh on the anvil of Article 14 of the Constitution, except, of course, when it fails to clear the test of arbitrariness and discrimination which would render it violative of Article 14 of the Constitution.

In respect of tax levy provisions, the Supreme Court held that the State Legislature undoubtedly is competent to make a law relating to taxes for the benefit of the State or other local authorities therein in respect of professions, trades, callings or employments. It is traceable to Entry 60 of List of the Seventh Schedule, but that power of the Legislature to make such a law to levy and collect the profession tax is made subject to the restrictions as provided for under Article 276(2) of the Constitution. The purpose of Article 276 is not to amend the State’s power to tax profession founded on Entry 60 but is to provide that such tax is not invalid on the ground that it relates to a tax on income.

It is well settled that a tax on profession is not necessarily connected with income. A tax on income can be imposed if a person carries on a profession, trade, calling, etc. Such a tax on profession is irrespective of the question of income. There is no other restriction imposed upon a State Legislature in making law relating to tax on profession, trade, calling and employment. There can be no doubt whatsoever that a State Legislature cannot make any law to levy and collect profession tax at the rate of more than Rs.2,500 per person, per annum, in view of the restriction in Article 276(2) of the Constitution.

The Legislature is competent in its wisdom to define ‘person’ separately for the purposes of each of the enactments and different from the one in the General Clauses Act and create an artificial unit. The definition of ‘person’ in the General Clauses Act would not operate as any fetter or restriction upon the powers of the State Legislature to define ‘person’ and adopt a meaning different from that defined in the General Clauses Act.

The Supreme Court thus upheld the levy on different branches of same person at Rs.2,500 each.

Nirav Shah

Amendments to CST Act, 1956 by Union Budget 2010-11 and Recent Amendments toMVAT Act, 2002

VAT

(A) The Union Finance
Minister, through the Finance Bill, 2010, has proposed certain amendments to the
Central Sales Tax Act, 1956. The important aspects of the said amendments may be
noted as under :

1.
S. 6A :

This Section refers to
branch transfers and production of ‘F’ forms.

In this sub-section two
amendments are proposed.

(i)
Ss.(2) of S. 6A :

As per the present position,
if the assessing authority is satisfied that the particulars mentioned in ‘F’
forms are correct, he can allow the transfers as other than interstate sale
i.e., branch transfer.

By amendment, it is proposed
that the authority should satisfy that the particulars are true and also that
there is no interstate sale and then he should pass the order that the transfers
are other than interstate sale. It is further provided that this allowance will
be subject to Ss.(3), which is newly inserted.

This amendment now provides
more powers to the sales tax authorities. The authorities will now be entitled
to examine whether the transfers are inter- state sales, in spite of the fact
that the particulars in the ‘F’ forms are true. This appears to be with a view
to counter the observations in certain cases, where courts have held that once
the particulars are not disputed by the authorities, the claim has to be
allowed. Even if the transaction might have been interstate sale, because the
particulars in ‘F’ form would be correct, the branch transfer claim would have
been required to be allowed. The amendment is now proposed to correct the above
position.

(ii) By another amendment in
S. 6A, Ss.(3) is proposed to be inserted. By this sub-section, the powers of
reassessment/revision are proposed to be given to the sales tax authorities. As
per this new sub-section, the respective reassessing/revision authorities will
be entitled to modify the order passed u/s.6A(2), if new facts are discovered or
that the findings of the lower authorities were contrary to law. This amendment
appears to reverse the ratio of judgment of the Supreme Court in case of Ashok
Leyland Ltd. (134 STC 473) (SC). In this case, the Supreme Court has held that
once the ‘F’ forms are allowed, it cannot be reversed through reassessment or
revision, unless the same were found to be produced fraudulently. The
interpretation put by the Supreme Court was certainly appreciable as it can save
dealer from unending fishing inquiries, in spite of completion of assessments.
This judgment, in Ashok Leyland Ltd., has been followed in many other judgments
like in the case of Steel Authority of India Ltd. (10 VST 451) (CSTAA), etc.
Now, as per proposed amendment even if the ‘F’ forms are genuine and particulars
are true, the authorities will be entitled to reassess/revise, if the order
u/s.6A(2) was contrary to law. The dealers will now be required to be prepared
for long-drawn battles in spite of initial completion of assessments.

In Maharashtra there will be
one more issue.

Under the MVAT Act, 2002
there is no provision for reassessment/revision, but there is provision for
review. The terms used in newly inserted Ss.(3) are ‘reassessment/revision’,
thus an issue may arise whether it will take into account a ‘review’. Though,
the review is in the nature of revision, its legality is certainly debatable.

2.
Chapter VA :

By another amendment,
Chapter VA is proposed to be inserted in the CST Act, 1956. This Chapter
contains S. 18A, which has (5) sub-sections. The intention of this provision is
to provide appeal against the order passed u/s.6A(2) or (3) to the highest
appellate authority of the State. This appears to avoid first appeal stage. As
per the provisions of Chapter VI, the order passed by the highest appellate
authority of the State in relation to S. 6A is appealable to the Central Sales
Tax Appellate Authority (CSTAA). Normally, the original order is passed by
assessing authorities and against the same the first appeal is provided, before
going in appeal to the highest appellate authority of the State. The amendment
appears to cut down the first appeal stage. As per this amendment, the appeal
against the original order (assessment order) u/s.6A(2) and (3) will lie to the
highest appellate authority. It is also provided that if the appeal is filed
before the highest appellate authority, involving S. 6A(2) or (3), the dealer
will be entitled to take other incidental issues like rate of tax, computation,
penalty, etc. in the same order before the said highest appellate authority.
From such order of the highest appellate authority the further appeal will lie
to CSTAA.

This S. 18A is a
self-contained code giving procedural provisions also like time limit for filing
appeal, grant of stay, time limit for deciding appeal, etc. The
proposed S. 18A can be analysed as under :

S. 18(1)
: It provides that irrespective of any provisions under the General Sales Tax
Law of the State, the appeal against the order passed by the assessing authority
u/s.6A(2) or (3) of the CST Act should lie to the highest appellate authority of
the State. By explanation at the end of S. 18A, the meaning of the highest
appellate authority is provided. As per said Explanation, the highest appellate
authority means the Appellate Authority or Tribunal constituted under the
General Sales Tax Law except the High Court.

In other words, in Maharashtra, the highest appellate authority will be the Maharashtra Sales Tax Tribunal. Thus, from order of the assessing authority u/s.6A (2)/(3) appeal will be required to be filed directly before the Tribunal.

S. 18(2) : The time limit for filing appeal is prescribed by this sub-section, which is 60 days from service of impugned order. There appears to be no speaking power for condonation of delay in filing appeal.

By proviso to the said sub-section, it is provided that where the appeal is forwarded to the first appellate authority by the highest appellate authority as per proviso to S. 25(2), such pending appeal on appointed day should get transferred to the highest appellate authority. The appointed day will be notified in the official Gazette. So this will take place in future on a day as may be notified.

S. 18(3) : The highest appellate authority will pass appropriate order, after giving opportunity of hearing to both the parties.

S. 18(4) : Time limit for passing the order — As far as possible, the highest appellate authority should pass the order within six months from filing of appeal.

S. 18(5) : Powers of granting stay against the demand— It is stated that on making application to the highest appellate authority, it can grant stay after considering the tax already paid on the subjected goods in the said State or in other State. However, it is also provided that the highest appellate authority may ask to deposit certain amount as pre condition for admission of appeal.

3. S.20:

Amendment is also proposed in S. 20 of the CST Act, 1956, which relates to appeals to CSTAA. The Ss.(1) is proposed to be substituted. The substituted Ss.(1) provides that the appeal against the order of the highest appellate authority of the State, determining issues relating to stock transfer or consignment of goods, insofar as they involve dispute of inter-state nature, will lie to CSTAA. The present Ss.(1) is narrow in scope, as it mentions order u/s.6A r/w S. 9. The substitution appears to correct a technical flaw in existing sub-section. Since the appeal to CSTAA is from the order of the highest appellate authority, it may be passed under particular appeal provisions and hence references to S. 6A may not be necessary here. This amendment appears to be for correcting the above position.

4. S.22:

An amendment is also proposed in S. 22 to replace the words ‘pre-deposit’ as ‘deposit’. The amend-ment is procedural in nature.

By another amendment in S. 22, Ss.(1B) is proposed to be inserted. This appears to fill up the lacuna in present provision. There is no speaking provision for directing refund of tax to the dealer or to other State. This insertion is to give power to CSTAA to direct a particular State to refund the tax which is not due to it or to transfer the same to other State to whom CST belongs, based on appeal findings. The direction to refund will not be exceeding the amount which will be payable as CST.

Though the amendment is welcome, it has not tak-en care of all the issues, particularly arising under the Local Act. For example, in transferee State the dealer has paid Local tax and CSTAA considers it as inter-state sale from moving State, disallowing branch transfer claim. Now CSTAA can ask the transferee State to refund the amount equal to CST to moving State. However the purchasing dealer in transferee state will be at loss. He might have claimed set-off considering it as local purchase which is now considered as intersate purchase which will result in denial of his set-off claim. Remedial provisions are required to be provided to tackle such a situation.

5. S.25:

By one more amendment, the proviso to Ss.(2) of S. 25 is proposed to be omitted. This proviso provides for availment of first appeal by the dealer. However, now, since the said first appeal is sought to be avoided, the omission of this proviso is consequential.

B) Recent amendments in MVAT Act, 2002 :

The Government of Maharashtra has issued Ordinance No. II of 2010, dated 18-2-2010, by which S. 9(1) of the MVAT Act has been amended. By this amendment the proviso to S. 9(1) is deleted from the statute book. This proviso puts a limitation on the Government that it cannot amend schedules to increase the rate after two years from 1-4-2005. However, due to removal of the said proviso, now the Government can change the rates after two years also. Thus, the Government has assumed wide powers about increasing the rate of tax in VAT schedules.

By using the expanded powers, the Government of Maharashtra has issued Notification u/s. 9(1), dated 10-3-2010. By the said Notification changes are ef-fected in Schedule A and C. On most of the goods contained in Schedule C, the rate of tax is increased from 4% to 5% from 1-4-2010. The rate of tax on declared goods contained in Schedule C is retained at 4%, whereas on all other goods contained in Schedule C, the rate is increased to 5%.

On about 101 non-declared items contained in Schedule-C, the rate is increased from 4% to 5% from 1-4-2010. The same is done just before the Budget presentation.

[This is also against the accepted principle of uniformity of rate of tax in VAT regime.]

Amongst others, the changes will affect the necessities of common person like wheat and cereals/pulses, etc. The changes can be said to be of far-reaching effect. It will also affect the prices of goods, which are already high due to inflation and other reasons.

In fact, the Government of Maharashtra proposed to levy tax even on fabrics and sugar. However, by Circular 11T of 2010, dated 17-3-2010, it is clarified that the tax position in relation to sugar and fabrics will continue as it is at present and no change will take place from 1-4-2010. We hope that the Government will reconsider this mass increase in other items also, keeping into account the common good.

Nirav Shah

Transfer to job worker vis-à-vis requirement of F form

As per the provisions of the CST Act, 1956, inter-State sales covered by S. 3(a) are liable to CST in the moving State. Normally any movement outside the State is looked upon by the Sales Tax authorities as liable to tax. Therefore, even if the goods are moved to one’s own branch in other State or agent in other State, the sales tax authorities of the moving State may make presumption that the movement is because of sale and hence liable to tax. The movement of goods to own branch or agent cannot be considered to be sale, as there are no two separate entities to constitute such transfer as sale. However, it is possible that the dispatch to a branch may be in pursuance of pre-existing purchase order from any customer and in such case the transaction can be considered as inter-State sale. In fact such issues create lot of litigation. To overcome such disputes at the assessment stage itself, the CST Act has provided mechanism by way of S. 6A. The said Section is reproduced below for ready reference.

“S. 6A. Burden of proof, etc., in case of transfer of goods claimed otherwise than by way of sale :

(1) Where any dealer claims that he is not liable to pay tax under this Act, in respect of any goods, on the ground that the movement of such goods from one State to another was occasioned by reason of transfer of such goods by him to any other place of his business or to his agent or principal, as the case may be and not by reason of sale, the burden of proving that the movement of those goods was so occasioned shall be on that dealer and for this purpose he may furnish to the assessing authority, within the prescribed time or within such further time as that authority may, for sufficient cause, permit, a declaration, duly filled and signed by the principal officer of the other place of business, or his agent or principal, as the case may be, containing the prescribed particulars in the prescribed form obtained from the prescribed authority, along with the evidence of dispatch of such goods [1] and if the dealer fails to furnish such declaration, then, the movement of such goods shall be deemed for all purposes of this Act to have been occasioned as a result of sale.

(2) If the assessing authority is satisfied after making such inquiry as he may deem necessary that the particulars contained in the declaration furnished by a dealer U/ss.(1) are true, he may, at the time of, or at any time before, the assessment of the tax payable by the dealer under this Act, make an order to that effect and thereupon the movement of goods to which the declaration relates shall be deemed for the purpose of this Act to have been occasioned otherwise than as a result of sale.

Explanation : In this Section, ‘assessing authority’, in relation to a dealer, means the authority for the time being competent to assess the tax payable by the dealer under this Act.”

As seen from the Section, the burden is cast upon the moving dealer to prove that the movement to branch/agent or principal, as the case may be, is not in pursuance of any sale. Prior to 11-5-2002, the moving dealer can produce satisfactory evidence about dispatch, etc. It was also optional on his part to produce ‘F form’ to support his claim, but it was not mandatory. After amendment on 11-5-2002 in the CST Act the production of F form to establish the claim of branch transfer/transfer to agent, etc. has become compulsory. Therefore the production of F form has got importance and it is also sometime a cause of litigation. In this brief note the requirement of production of F form has been discussed in light of certain circulars/judgments.

As is clear from S. 6A of the CST Act, the F form is required when the goods are transferred to branch or agent. The concept of branch as well as agent is well known in the commercial world. Branch is a part of the transferor entity. Agent relationship will be created based on terms of the parties. As known, an agent is a separate entity than the transferor, but he represents the transferor and acts on his behalf. It is said that agent steps in the shoes of principal. There may be written agreement for the same or may be inferred from the relevant circumstances or documents. Generally agents work on commission basis. Thus the relationship created is of principal and agent and when the principal transfers the goods to agent he has to obtain F form from the agent.

The other situation is that the dealer may be sending goods to a party in other State for job work. Here the job worker will charge his job work charges to his customer i.e., the transferor. It can be seen that here the relationship is principal to principal. In other words the relationship between transferor and job worker is not of principal and agent or transfer to branch, etc. Therefore the provisions of S. 6A are not applicable in such cases and F forms are not required to be exchanged. However the situation was confusing and many dealers exchanged the F forms or asked for the said forms from respective parties. The Commissioner of Sales Tax, Maharashtra State realising the situation rightly issued circular bearing No. 16T of 2007, dated 20-22007. By this Circular the Commissioner of Sales Tax explained the nature of relationship as agent. In the circular it was further clarified that when the dealer sends the goods to job worker, the relationship is as principal to principal and F form is not required to be obtained from such job worker outside the State. The implication was also that the job worker in Maharashtra was not required to issue F form to his other State customer. Thus the situation became very clear and beyond doubt.

However, thereafter there came a judgment from the Allahabad High Court reported in the case of Mis. Ambica Steel Ltd. v. State of Uttar Pradesh, (12 VST 216). In this case the issue was out of a writ petition. The petitioner in that case had sent iron and steel ingots to various companies situated outside the State of Uttar Pradesh for the purpose of converting them into iron and steel rounds, bars and flats. The converted material was to be sent back to the petitioner in Uttar Pradesh. The petitioner company also received iron and scrap from various firms outside the State of Uttar Pradesh for the purpose of converting the same into iron and steel billets and ingots with a direction to return the converted goods to those firms. The issue before the Court was whether the petitioner is required to submit the declaration in Form F in respect of the transaction of job work performed by it or got done by others. The Department authorities were relying upon Cir-cular issued by Commissioner of Trade Tax, U.P. to insist on such forms.

In the Circular dated November 28, 2005 issued by the Commissioner of Trade Tax, Uttar Pradesh, it was mentioned that ul s.6A of the Central Sales Tax Act, 1956 form F is required to be filed in respect of all transfers of goods which are otherwise than by way of sale including goods sent or received for job work or goods returned.

Allahabad High Court observed that S. 6 of the Central Sales Tax Act, 1956 is the charging Section creating liability to tax on inter-State sales and by reason of S. 6A(2) a legal fiction has been created for the purpose of the Act that transaction has occasioned otherwise than as a result of sale. S. 6A puts the burden of proof on the person claiming transfer of goods otherwise than by way of sale and not liable to tax under the Central Act. The burden would be on dealer to show that movement of the goods had been occasioned not by reason of any transaction involving any sale of goods, but by reason of transfer of such goods to any other place of business or to the agent or principal, as the case may be, for which the dealer is required to furnish prescribed declaration form. If the dealer fails to furnish such declaration, by reason of legal fiction, such movement of goods would be deemed for all purposes of the Act to have been occasioned as a result of sale. The High Court held that if the petitioner claims that it is not liable to tax on transfer of goods from U.P. to a place outside State, then it would have to discharge the burden placed upon it ul s.6A by filing declaration in form F. It would be immaterial whether the person to whom the goods are sent for or received after job work is a bailee. The requirement to file declaration in form F is applicable in cases of goods returned also, held High Court. Thus Hon. High Court dismissed the Writ Petition.

Thus the Allahabad High Court held that F form is required even in case of job work transactions and goods return transaction. It can be respectfully said that the said judgment requires reconsideration in light of above-discussed facts and legal position about agent and principal. However it is also a law that till the binding judgment is not unsettled by proper higher forum, etc., it has to be followed. It is also required to be noted that the judgment of any High Court under the Central Act is binding on all the lower authorities in all the States of India unless the Jurisdictional High Court of the particular state has laid down anything different. This principle of law is clear from judgment in case of Maniklal Chunilal & Sons Ltd. v. CIT, (24 ITR 375).

Therefore the situation that now arises is that for transfer of goods to job worker, the sender will be required to obtain F form from him even if he is in other than D. P. State. Similarly when the job worker sends goods back to his customer, he will be required to obtain F form from his principal (customer).

The other implication created by this judgment is that the authorities may insist on furnishing of F form even for sales return. For example, a dealer in Maharashtra has sold the goods to a dealer in V.P., the dealer in V.P. may be returning back the goods to the vendor in Maharashtra as sales returns. In such circumstances also it cannot be said that the goods are sent back by the V.P. dealer to Maharashtra dealer as agent, etc. The transaction is as principal to principal and requirement of F form cannot arise. However in the light of the above judgment the F forms may be insisted upon.

Thus it can be said that some unwarranted burden about exchange of F forms has now arisen. Fortunately, in Maharashtra the Commissioner of Sales Tax has again understood the problems faced by the dealers. Therefore he has come out with a fresh Circular bearing No. ST of 2009, dated 29-1-2009. In this Circular the Commissioner of Sales Tax has reconfirmed the position spelt out by him in his earlier Circular 16T of 2007. Therefore it can be said that the dealers in Maharashtra will not be required to obtain the F forms in case of job work transfers or in case of sales return in spite of the above judgment of Allahabad High Court. However this Circular will not have any effect in other States and the dealers in other States will be governed by the above judgment and may insist on F forms for their transactions with Maharashtra dealers. As clarified in Circular No. ST of 2009, dated 29-1-2009 the Maharashtra dealers will be entitled to issue the same to facilitate their parties in other states. Thus an appreciable practical way has been found out by the Commissioner of Sales Tax, Maharashtra.

Let’s hope that the correct legal position will be clarified by competent authority like Larger Bench of Allahabad High Court or Supreme Court or High Court/s of other State/s by which the dealers will be saved from such unproductive work of issuing forms.

Nirav Shah

Important Issues

VAT

Software — Whether Sales Tax (VAT) or Service Tax :

Recently by budget amendments (Finance Bill 2008), Service
Tax is contemplated on software services. Software is also considered as taxable
goods under the Sales Tax (VAT) laws. Thus a question arises as to whether
software will be taxable to Service Tax or Sales Tax (VAT). The issues related
to the above dilemma can be discussed briefly as under :

To initiate, it will be necessary to refer to legal
background of the subject. Under the Maharashtra Value Added Tax Act, 2002 (MVAT
Act, 2002) sale of goods is liable to tax. In entry C-39, intangible goods are
covered as liable to tax @ 4%. For purpose of entry C-39, intangible goods means
those goods which are specified in the Notification under the said entry.

The said entry and the notification thereunder reads as
under :

“39. Goods of intangible or

incorporeal nature as may

be notified from time to

time by the State Govt. 4% 1-4-2005

in the Official Gazette. to till date”

The Notification issued under C-39 is as under :

Notification

Finance Department, Mantralaya, Mumbai-400032

Date : 1-6-2006

Maharashtra Value Added Tax Act, 2002.

No. VAT-1505/CR-114/Taxation 1 — In exercise of the powers
conferred by entry 39 of Schedule ‘C’ appended to the Maharashtra Value Added
Tax Act, 2002 (Mah. IX of 2005) and in supersession of Government Notification,
Finance Department, No. VAT-1505/CR-114/Taxation-1, dated the 1st April 2005,
the Government of Maharashtra hereby specifies the following goods of intangible
or incorporeal nature for the purposes of the said entry, namely :

Sr. No.	Name of the goods of intangible or incorporeal nature
(1)	Patents
(2)	Trademarks
(3)	Import licences including exim scrips, special import licences and duty-free advance licences.
(4)	Export permit or licence or quota
(5)	Software packages
(6)	Credit of duty entitlement Passbook
(7)	Technical know-how
(8)	Goodwill
(9)	Copyright
(10)	Designs registered under the Designs Act, 1911.
(11)	SIM cards used in mobile phones
(12)	Franchise, that is to say, an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified or associated with the franchisor, whether or not a trademark, service mark, trade name or logo or any symbol, as the case may be, is involved.
(13)	Credits of duty-free replenishment certificate
(14)	Credit of duty-free Import Authorisation (DFIA)

It can be seen that software packages are included in the
above Notification under entry C-39 and hence, as such, software packages are
liable to Sales Tax @ 4%. Therefore it is necessary to find out whether software
is sold as ‘goods’ so as to be liable under MVAT Act 2002 or software services
are provided so as to be liable to Service Tax, but not Sales Tax.

The next issue therefore will be the nature of development of software. Software development can be of two types. Software can be developed which is meant for free marketing. These are known as off-the-shelf or branded softwares. In case of Tata Consultancy Services v. State of A.P. and Others, (137 STC 620), the Hon. Supreme Court has held that such ‘off-the-shelf’ softwares are liable to sale tax as sale of goods. The Supreme Court observed as under:

“In our view, the term ‘goods’ as used in article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (2001) 4 SCC 593; (2001) 124 STC 59. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to Sales Tax. Even intellectual property, once it is put on to a media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become ‘goods’. We see no difference between a sale of a software programme on a CD/floppy disc from a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is just of the media, which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films, the buyer is purchasing the intellectual property and not the media, i.e., the paper or cassette or disc or CD. Thus a transaction of sale of computer software is clearly a sale of ‘goods’ within the meaning of the term as defined in the said Act. The term ‘all materials, articles and commodities’ includes both tangible and intangible / incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed, etc. The software programmes have all these attributes.

At this stage it must be mentioned that Mr. Sorabjee had pointed out that the High Court has, in the impugned judgment, held as follows :

“……..In our view, a correct statement would be that all intellectual properties may not be ‘goods’ and therefore branded software with which we are concerned here cannot be said to fall outside the purview of ‘goods’ merely because it is intellectual property; so far as ‘un-branded software’ is concerned, it is undoubtedly intellectual property, but may perhaps be outside the ambit of ‘goods’.”

Mr. Sorabjee submitted that the High Court correctly held that unbranded software was ‘un-doubtedly intellectual property’. Mr. Sorabjee submitted that the High Court fell in error in making a distinction between branded and un-branded software and erred in holding that branded software was ‘goods’. We are in agreement with Mr. Sorabjee when he contends that there is no distinction between branded and unbranded software. However, we find no error in the High Court holding that branded software is goods. In both cases, the software is capable of being abstracted, consumed and used. In both cases the software can be transmitted, transferred, delivered, stored, possessed, etc. Thus even unbranded software, when it is marketed/ sold, may be goods. We, however, are not dealing with this aspect and express no opinion thereon because in case of unbranded software other questions like situs of contract of sale and/ or whether the contract is a service contract may arise.”

In view of above observations, once the softwares are held to be sold, liable to Sales Tax, the question of attracting Service Tax cannot arise. Normally, branded softwares (off-the-shelf) will be liable to Sales Tax.

The other kind of softwares are customised softwares.

In case of customised software, there can be two situations. A developer can develop the software as per specification of customer as his property.

For example, the developer of software can develop the software as per customer’s specification, but copyright in the software remains with the developer. Subsequently, the developer will transfer the said software to the customer against agreed price. In this case though it is customised software, still it can be said to be sale of the goods. Though the Supreme Court has not directly resolved the above issue in case of Tata Consultancy Services v. State of A.P. and Others, (137 STC 620), there are observations which go to suggest that customised software can also be liable to Sales Tax. The relevant observations are already reproduced above.

Accordingly, the above type of customised software can be liable to Sales Tax. In this respect, reference can also be made to the determination order passed by the Commissioner of Sales Tax, Maharashtra State in case of Mastek Ltd. (DDQ 11-2001/ Adm-5/83/B-7 dated 31-8-2004).

In this case, it was held that though the software was a customised software, since the property in the software belonged to the developer, which was transferred against price, it was a taxable transaction under Sales Tax.

The other way by which customised software can be developed is that the software is developed as a property of the customer. In other words, in this kind of development, the copyright in the software remains with customer right from inception. The customised software is developed as property of the customer and copyright belongs to such customer. In such case, there is no question that the software first belongs to the developer and subsequently transferred to the customer against price. In this case, since the software belonged to the customer itself, there is nothing which the developer can transfer to him. Under above circumstances, the transaction will be that of rendering of software development services. It cannot be liable to Sales Tax and thus it may be liable to Service Tax.

However, the issue about the nature of transaction of software as to sale or service is very delicate. The above is a broad thinking on the subject. There may be various other possibilities. For example, a case may arise about modifying or improving the existing software. The developer in such a case may be providing further modules to already existing software. The module itself may be a kind of software. Under such circumstances, the issue will be whether the charges received by the developer are for sale of software or for rendering of services.

If above situation is tested in the light of earlier discussion, it has to be concluded that providing modules for improving the software is nothing but rendering of services. The module, though prepared separately, has to be merged into existing software to improve it. The existing software is belonging to the customer. Thus by providing module the developer is in effect improving the existing software. There is no question of independent existence of module prepared by developer so as to become ‘goods’ by itself. The charges will be for providing service and not sale of any goods. Thus there can be various kinds of situations. The nature of transaction is required to be ascertained by finding out the copyright status in the software so developed. It is expected that the discussion above will be useful for further deliberations on the issue.

Recent Amendments to Maharashtra VAT Rules

The Government of Maharashtra, vide Notification dated 14th March 2008, has made certain amendments to the Maharashtra VAT Rules, 2005 particularly in Rules 17, 18 and 81, pertaining to filing of returns by the dealers. The Commissioner of Sales Tax has also issued a Notification dated 14th March 2008, whereby certain dealers shall now file e_return for the periods commencing from 1st February 2008 onwards.

The existing return forms have been replaced by new return forms. The Commissioner of Sales Tax has issued a Trade Circular No. 8T of 2008, dated 19th March 2008, explaining above amendments and the procedure to be followed by dealers in respect of payment of taxes and filing of returns. Relevant portion of the Trade Circular is reproduced below for the benefit of our readers:

“(3) Introduction:

The Government, by Notification No. VAT/1507 / CR-94/Taxation-1, dated 14th March 2008, has carried out certain amendments to Rule 17 and Rule 18 of Maharashtra Value Added Tax Rules, 2005 pertaining to filing of return. The amendment also provides for filing of e-return by certain categories of dealers. The rule authorised the Commissioner of Sales Tax to notify the date for mandatory filing of e-return by certain categories of dealers. In pursuance of this delegation the Commissioner of Sales Tax has issued the Notification dated 14th March 2008. It has now been made mandatory for registered dealers whose tax liability in the previous year was Rs.1 crore or more to file returns electronically for the periods starting on or after 1st February 2008.

(4) Electronic filing of returns:

Sub-rule (5) of Rule 17 is substituted. The substituted sub-rule provides for filing of returns electronically. The registered dealer liable to file return electronically should first make the payment of tax along with interest, if any, in chalan 210 in the designated banks. As per the Notification, the registered dealers whose tax liability during the previous year was Rs. one crore or more, shall make payment and file electronic returns as provided in the said sub-rule (5). For the purposes of the Notification, the expression ‘tax liability’ has the same meaning as assigned to it in the Explanation-I to sub-rule (4) of the said Rule 17.

(4.1) These dealers shall file the return electronically in the respective form applicable to them. The templates of new return form are provided on the new website of the Sales Tax Department www.mahavat.gov.in. Every dealer to whom the above Notification applies shall download the relevant template of the form and after making data entry in the relevant field, upload it using his digital signature. The uploading shall be done on or before the due date prescribed for filing of the returns. The system shall generate an acknowledgement in duplicate.

(4.2) However, if the dealer does not have or has not used digital signature, then he shall submit a copy of the acknowledgement duly signed by an authorised person within 10 days from the uploading of the return to the respective authority specified in sub-rule (2). For the time being, if a dealer is with LTU, a copy of the acknowledgement may be submitted to their respective officer of the Large Taxpayers Unit (LTU),who is regularly in liaison with the dealer.

(4.3) To facilitate filing of e-return, detailed guidance note explaining the procedure to file of e- return is placed on the website www.mahavat.gov.in. If any dealer requires further assistance for filing of e-return, he may contact the respective liaison officer who has been assigned for this job. If the dealer requires further assistance in filing e-return, he or his authorised representative may visit respective Sales Tax authorities, wherein he will be guided regarding the e-filing of return. A dedicated help desk is also created in Mazgaon Office to answer the queries pertaining to e-returns. The dealer may contact the help desk at 022-23735621/022-23735816.

(4.4) Since this is the first month for filing of e-return, the dealers may face some difficulties in preparing and uploading the electronic return. Considering the likely difficulties faced by the dealers, a concession is provided only for this month to upload the e-return even after the due date i.e., 21st March 2008, but on or before 31st March 2008. The e-return uploaded up to 31st March 2008 shall not be treated as late, provided the payment of tax as per return is made on or before due date. This concession is applicable only for the first month and for the subsequent period the dealers will remain required to upload the return on or before the due date.

(5) Change in return Forms:

The earlier return Forms 221, 222, 223, 224 and 225 have been replaced with the new returns Forms-231, 232, 233, 234 and 235, respectively. These Forms are made available on the website of the Department (www.mahavat.gov.in and www.vat.maharashtra.gov.in). The dealer can download these Forms from the menu download section of the website. All the returns, including the returns for the earlier period, should now be filed in the aforesaid new return Forms.

(5.1) The new return Forms are applicable to all dealers including those who are not required to file electronic returns. The efforts are being made to make these Forms available at all the locations in the State. However, the dealers except the dealers required to file e-return may file returns in the old Forms 221 to 225. This facility will be available only in the respect of returns which are to be filed before 31st March 2008. Thus, all the returns filed after 1st April 2008 (including the returns for the earlier period, if any) should invariably be in the new return Forms.

(5.2) Another amendment is made to sub-rule (1) and sub-rule (3) of Rule (5) of the Central Sales Tax (Bombay) Rules, 1957 to provide for electronic return. The old return Form IIIB is now replaced by new Form IIIE. Therefore, dealers filing returns on or after 1st February 2008 shall file return in the new Form.

(6) Filing of returns by oil companies:

The first amendment to sub-rule (2) provides that notified oil companies shall file a copy of their return in Form 235 with the Joint Commissioner of Sales Tax (LTU), Mumbai within 3 days of filing of the return in Form 235.

7) Returns of dealers covered by Package Scheme of Incentives:
By this amendment a new procedure is prescribed for certain dealers under Package Scheme of Incentives. The amendment provides that if the dealer holds a certificate of entitlement under any Package Scheme of Incentives except the Power Generation Promotion Policy, 1998, then the dealer shall file return to the registering authority having jurisdiction over the respective place of business of the dealer, in respect of which he holds the certificates of entitlement.

The proviso appended to this clause states that if the deale, ‘has two or more entitlement certificates issued to him, then he shall file the required return with that registering authority which has jurisdiction over the place of business pertaining to the entitlement certificate whose period of entitlement ends later. This return should show aggregate figures of all sales and purchases pertaining to all the eligible units of the dealer. A complimentary amendment is also carried out in Rule 81.

(8) No separate return :

Earlier by clause (c) of sub-rule (2) of Rule 17 certain dealers were permitted to file separate returns for their respective places or constituents of the business. The said Rule is now deleted. Therefore, the permissions granted earlier, if any, stands automatically cancelled.

(9) Yearly return by deemed dealers:

The Explanation to clause (8) of S. 2 defines certain persons and authorities to be deemed dealers. These dealers were required to file return as per the regular periodicity applicable to dealers. By this amendment, it is provided that every dealer to whom the Explanation to clause (8) of S. 2 applies shall file annual return if his tax liability during the previous year is Rs.1 crore or less. The annual return is to be filed within 21 days from the end of the year. However, the facility to file annual return is not automatic. The dealer covered by the Explanation to clause (8) of S. 2 will have to apply to the Joint Commissioner of Sales Tax (Returns) in Mumbai and to the respective Joint Commissioner of Sales Tax (VAT Administration) in the rest of the State to be entitled to file annual return. There is no prescribed format of the application. The annual return can be filed only after the Joint Commissioner of Sales Tax concerned grants the required permission.

10. Change in periodicity for newly registered dealers:

Sub-rule (1) of Rule 18 has been amended. So far newly registered dealers were required to file quarterly returns. It is now provided that these dealers shall file six-monthly returns for the period starting from 1st April 2008.”

Nirav Shah

Works Contract vis-à-vis Service Contract – Recent Position

Recently, Hon. Bombay High Court has decided issue about nature of Works Contract vis-à-vis Service Contract. The issue pertained to 1989-90 wherein the transaction about plate making was held as not amounting to works contract by Tribunal. From Tribunal judgment, the matter was referred to Bombay High Court by way of Reference in case of Comm. of Sales Tax, Maharashtra vs. M/s.Ramdas Sobhraj (STR No.9 of 2003 dt. 25.10.2012).

The facts are that the appellant was engaged in plate making activity. Hon’ble High Court recorded facts as under:

“c) In the job work of plate making the customers of the respondent-assessees supplies to the respondent-assessees duly grained zinc or aluminum plates. On receipt, plates are coated by dipping in water wherein gun bio chromate is dissolved. Thereafter positives are exposed on the treated plates by halogen lamps. The image is formed by the positives on the plates and the same is developed in the solution of calcium, lactic acid ferric chloride, cupric chloride and hydrochloride. The plates are thereafter washed in industrial solvent, as a result of which all the chemicals are washed out and only the images remain on the plates. Thereafter, lacquer and ink are applied on the plates. On a specific query, we were informed that lacquer and ink are applied on the plates so as to ensure that the images on the plates do not get disturbed/smudged by constant use. After the above process, the plates are dried and again washed with water and returned to the customers.”

On above facts, the arguments of Department were as under:

(i) there is a deemed sale by way of transfer of property in ink and lacquer as contemplated u/s. 2(l) of the Works Contract Act;

(ii) this is particularly so as the lacquer and ink are used by the respondent-assessee in the process of plate making, so as to ensure that images formed on the plates are not disturbed/smudged due to constant use. The lacquer and ink in plate so used get settled on the plate so as to become a part of the plate;

(iii) the Tribunal applied an incorrect test to hold that there is no transfer of property of lacquer and ink viz. the thickness of the plates continue to remain the same both before and after the process; and

(iv) in any case the issued raised in this reference stands concluded in favour of the applicant-revenue by the decision of this court in the matter of Commissioner of Sales Tax v. Matushree Textiles Limited reported in 132 Sales Tax Cases Page 539.

The arguments on behalf of dealer were as under:

(i) there has been no deemed sale by way of transfer of property in ink & lacquer while executing the job of plate making as held by the Tribunal.

(ii) the decision of this court in the matter of Matushree Textiles Ltd (Supra) will not apply in view of the subsequent decision of the Apex Court in the matter of Bharat Sanchar Nigam Ltd. v. UOI reported in 145 STC 19 which holds that there must be a transfer of goods as goods for the work Contract Act to be applicable. Similarly, the dominant intention of the transfer viz. whether to provide services or transfer of goods will be determinative of there being transfer of goods or not as held by the Apex Court in the matter of Idea Mobile Communication Ltd. v. Commissioner of Central Excise reported in 43 VST. Page 1. In this case, there is no transfer of goods as goods nor was there any intent to transfer the ink and lacquer to its customers; and

(iii) the order of the Tribunal is unexceptionable and the Court should affirm the view of the Tribunal.

The High Court, in relation to argument about dominant object, held that the understanding on the part of the dealer is not correct. The High Court referred to following part in the judgment in the case of Bharat Sanchar Nigam Ltd. (145 STC 19)(SC).

“47. In Rainbow Colour Lab v. State of M.P. (2000) 2 SCC 385, the question involved was whether the job rendered by the photographer in taking photographs, developing and printing films would amount to a “work contract” as contemplated under article 366 (29A)(b) of the Constitution read with section 2(n) of the M.P. General Sales Tax Act for the purpose of levy of sales tax on the business turnover of the photographers.

48. The court answered the questions in the negative because, according to the court:

“Prior to the amendment of article 366, in view of the judgment of this Court in State of Madras v. Gannon Dunerley & Co. (Madras) ltd. (1958) 9 STC 353; AIR 1958 SC 560, the states could not levy sales tax on sale of goods involved in a works contract because the contract was indivisible. All that has happened in law after the 46th Amendment and the judgment of this Court in Builders’ case (1989) 2 SCC 645 is that it is now open to the States to divide the works contract into two separate contracts by a legal fiction: i) contract for sale of goods involved in the said works contract, and (ii) for supply of labour and service. This division of contract under the amended law can be made only if the works contract involved a dominant intention to transfer the property in goods and not in contracts where the transfer in property takes place as an incident of contract of service. What is pertinent to ascertain in this connection is what was the dominant intention of the contract. On facts as we have noticed that the work done by the photographer which, as held by this Court in Assistant Sales Tax officer v. B.C.Kame (1977) 1 SCC 634 is only in the nature of a service contract not involving any sale of goods, we are of the opinion that the stand taken by the respondent-State cannot be sustained.”

49. This conclusion was doubted in Associated Cement Companies Ltd. v. Commissioner of Customs (2001) 4 SCC 593 saying :

“The conclusion arrived at in Rainbow Colour Lab case (2000) 2 SCC 385, in our opinion, runs counter to the express provision contained in article 366(29A) as also of the Constitution Bench decision of this Court in Builders’ Association of India v. Union of India (1989) 2 SCC 645.

50. We agree. After the 46th Amendment, the sale elements of those contracts which are covered by the six sub-clauses of clause (29A) of article 366 are separable and may be subjected to sales tax by the States under entry 54 of List II and there is no question of the dominant nature test applying. Therefore when in 2005, C.K. Jidheesh v. Union of India (2005) 8 Scale 784 held that the aforesaid observations in Associated Cement were merely obiter and that Rainbow Colour Lab (2000) 2 SCC 385 was still good law, it was not correct. It is necessary to note that Associated Cement (2001) 4 SCC 593 did not say that in all cases of composite transaction the 46th Amendment would apply.”

Dealer also referred to the judgment of Idea Mobile Communication (43 VST 1)(SC), to substantiate its point of service nature of transaction. The High court rejected the same on the ground that it is under Service Tax and not relevant to works contract.

In relation to other argument about transfer of property in goods as goods, the High Court relied extensively upon the judgment in case of Matushree Textiles Ltd. (132 STC 539)(Bom) and reversed the judgment of the Tribunal and held the transaction as liable to tax.

Implications

The above judgment decides one of the important aspects about works contract vis-à-vis service transaction. In Bharat Sanchar Nigam Ltd. (145 STC 91). Hon. Supreme Court amongst others, in para 44, 45 has observed as under:

“44.. Gannon Dunkerley survived the 46th Constitutional Amendment in two respects. First with regard to the definition of “sale” for the purposes of the Constitution in general and for the purposes of entry 54 of List II in particular except to the extent that the clauses in article 366(29A) operate. By introducing separate categories of “deemed sales”, the meaning of the word “goods” was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, goods, delivery, etc., would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. Courts must move with the times. But the 46th Amendment does not give a licence, for example, to assume that a transaction is a sale and then to look around for what could be the goods. The word “goods” has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by article 366(29A). Transactions which are mutant sales are limited to the clauses of article 366(29A). All other transactions would have to qualify as sales within the meaning of the Sales of Goods Act, 1930 for the purpose of levy of sales tax.

45. Of all the different kinds of composite transactions, the drafters of the 46th Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in clauses (b) and (f) of clause (29A) of article 366, there is no other service which has been permitted to be so split. For example, the clauses of article 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which it can be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.”

Therefore, once again, a controversy was arising as to dominant intention. In case of transaction involving very small value of goods and where skill was more important, there was a feeling that the transaction should not be a works contract but a service contract. However, the above judgment of Hon. Bombay High Court has dispelled any doubt about the nature of transaction and it appears that the ratio of Matushree Textiles Ltd. (132 STC 539)(Bom) will prevail for all purposes for interpretation of nature of works contract transaction.

Nirav Shah

Entry Tax on Goods

Under The Maharashtra Tax on the Entry of Goods into Local Areas Act, 2002 (Entry Tax Act, 2002), tax is levied on notified goods imported from outside the state of Maharashtra. For example, if the building contractor imports tiles from Gujarat and uses it in his contract activity, the issue can arise whether he is liable for entry tax on tiles? The contractor must be discharging liability on such contract under the MVAT Act, 2002. On the above facts, the issue about levy of Entry Tax can be examined as under:

Under Maharashtra Tax on the Entry of Goods into Local Areas Act, 2002, tax is attracted on tiles imported from outside the State of Maharashtra for consumption, use or sale. The charging section 3 of the said Act provides as under:

“3 (1) There shall be levied and collected a tax on the entry of the goods specified in column (2) of the Schedule, into any local area for consumption, use or sale therein, at the rates respectively specified against each of them in column (3) thereof and different rates may be specified in respect of different goods or different classes of goods or different categories of persons in the local area. The tax shall be levied on the value of the goods as defined in clause (n) of sub-section (1) of section 2. The State Government may, by notification in the Official Gazette, from time to time, add, modify or delete the entries in the said Schedule and on such notification being issued, the Schedule shall stand amended accordingly;

Provided that, the rate of tax to be specified by the Government in respect of any commodity shall not exceed the rate specified for that commodity under the [the Value Added Tax Act] or, as the case may be, the Maharashtra Purchase Tax on Sugarcane Act, 1962:

Provided further that, the tax payable by the importer under this Act shall be reduced by the amount of tax paid, if any, under the law relating to General Sales Tax in force in the Union Territory or the State, in which the goods are purchased, by the importer:

Provided also that no tax shall be levied and collected on specified goods entering into a local area for the purpose of such process as may be specified, and, if such processed goods are sent out of the State.

Explanation – No tax shall be levied under this Act on entry of any fuel or other consumables contained in the fuel tank fitted to the vehicle for its own consumption while entering into any local area.

(2) Notwithstanding anything contained in sub-section (1), there shall also be levied a tax in addition to the tax leviable in accordance with sub-section (1) on the entry of Petrol and High Speed Diesel Oil in any local area for consumption use or sale therein at the rate of one rupee per litre.
(3) …
(4) …

(5) Notwithstanding anything contained in subsection (1) and (2), no tax shall be levied on the specified goods, imported by a dealer registered under the [the Value Added Tax Act], who brings goods into any local area for the purpose of resale in the State or sale in the course of inter-State trade or commerce or export out of the territory of India:

Provided that, if any such dealer, after importing the specified goods for the purpose of resale in the State or sale in the course of inter-State trade or commerce or export out of the territory of India, consumes such goods in any form or deals with such goods in any other manner except reselling the same, he shall inform the assessing authority before the 25th day of the month, succeeding the month in which such goods are so consumed or dealt with and pay the tax, which would have been otherwise leviable under sub section (1) or (2).

(6) If any dealer having imported the specified goods for the ostensible purpose of resale or, as the case may be, sale, deals with such goods in any other manner or consumes the same and does not inform the assessing authority as provided in sub-section (5) or does not pay the tax as required under sub-section (5) within the specified period, the assessing authority shall assess the amount of tax which the dealer is liable to pay under subsection (1) or (2) and also levy penalty equal to the amount of tax due. ….”

It may be noted that section 3(5) exempts from levy, the specified goods, which are for resale.

Thus, if the tiles are held to be imported for resale, no Entry Tax can be attracted. The issue will be whether use of tiles in works contract will be considered to be ‘resale’, so as not to attract any liability under Entry Tax Act?

Section 2(2) of Entry Tax Act, 2002 provides as under:

“2 (2) Words and expressions used but not defined in this Act but defined in the [the Value Added Tax Act, or the Maharashtra Value Added Tax Rules, 2005] shall have the meanings respectively assigned to them under that Act or the Rules.”

Therefore the terms not defined in Entry Tax Act will carry the meaning as given in MVAT Act, 2002.

The term ‘resale’ is defined in section 2(22) of MVAT Act, 2002 as under:

“(22) ‘resale’ means a sale of purchased goods-

(i) in the same form in which they were purchased, or

(ii) without doing anything to them which amounts to, or results in, a manufacture, and the word ‘resell’ shall be construed accordingly;”

As per facts, as stated above, the tiles are used by contractor in construction activity and they will be used in the same form as they are ready tiles for fitting. It is also a fact that works contract is a ‘sale’ transaction. This position is clear from definition of ‘sale’ in section 2(24) of MVAT Act, 2002, which defines ‘sale’ as under:

““(24) “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly;

Explanation,-—For the purposes of this clause,—

(a) a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in section 4 of the Central Sales Tax Act, 1956;

(b) (i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration;

(ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract including, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property…”

Thus it can be concluded that ‘works contract’ is a transaction of sale.

In works contract, tax is levied on the basis that there is sale of individual items used in the contract. It is due to the above position, the contractor is liable to pay tax under MVAT Act, 2002 as per goods involved and transferred during the execution of works contract. The net result is that there is sale of tiles by use in works contract and it is ‘resale’ within the meanings of section 2(22) of MVAT Act, 2002. Under the above circumstances, no Entry Tax is attracted on the contractor. This will be the position whether the contractor is discharging liability by statutory method of Rule 58 of MVAT Rules or under Composition method.

This position will apply to all notified goods which are used as it is in ‘works contract’ and on which tax liability under MVAT Act is discharged.

levitra

Nirav Shah

Works Contracts vis-à-vis Builders and Developers

Introduction

A very interesting issue was under litigation in relation to scope of ‘Works Contract’. The background of the works contract taxation is the landmark judgment of Hon’ble Supreme Court in case of Gannon Dunkerly & Co. (9 STC 353)(SC). While examining the scope of ‘sale’ for levy of sales tax, the Hon’ble Supreme Court held that the word ‘sale’ has to be interpreted in a limited sense. In fact, the Hon’ble Supreme Court held that ‘sale’ will have following meaning.

“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 the above passage, it is clear that to be a ‘sale’, the following criteria should 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) There must be money consideration and
(iv) Transfer of property i.e., transfer of ownership from seller to purchaser.

Therefore, if the transaction was composite i.e. it also had labour as well as service element in it, it was held that it was not covered within the sales tax laws.

46th Amendment to the Constitution of India
To bring the ‘works contract’ transactions within the purview of sales tax levy, the Constitution of India was amended vide 46th amendment to the Constitution, in the year 1983. Along with other transactions, the ‘works contract’ transactions were also ‘deemed to be a sale’ for the purpose of levy of sales tax. The said purpose was achieved by inserting clause (29A) in Article 366 of the Constitution of India.

The relevant part is reproduced herein below for ready reference:
(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) involved in the execution of a works contract;
(c) to (f) …… and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;”

Scope of the Supreme Court judgment
Wherever composite transactions were involving goods and services, they were deemed to be covered within the scope of above constitutional amendment and were considered to be taxable under sales tax laws. In other words, there was no controversy about such coverage.

However, the issue arose in relation to sale of under construction premises like sale of premises by builders and developers. Normally, the builders and developers come up with their own projects and enter into agreement with prospective buyers for sale of premises like flats and offices etc. The intention of the builder and prospective buyer is to give/get possession of immovable property like a ready flat. It was believed that such contracts are not works contracts.

The first controversy arose before Supreme Court in case of K. Raheja Construction (141 STC 298)(SC). In this case there was tri-party agreement where landlord as owner of land, K. Raheja as developer and prospective buyer were parties. The agreement was entered into when the construction was in progress.

The value of the land and construction was shown separately. The argument of the dealer i.e. K. Raheja was that the agreement is for sale of immovable property as premises and not for carrying out any ‘works contract’. However, the Supreme Court rejected the argument holding that the agreement is ‘works contract’.

Maharashtra Chamber of Housing Industry judgment
After above judgment in K. Raheja, MVAT Act, 2002, was amended on 20-06-2006, whereby definition of ‘works contract’ was provided in the Act. In view of this provision, the Commissioner of Sales Tax, Maharashtra State issued a circular fastening liability on builders. The amendment and the circular were challenged before the Hon’ble Bombay High Court based on sample agreement under Maharashtra Ownership Flat Act (MOFA). The main plea before the Hon’ble High Court was that the State cannot consider the agreement involving third element i.e. land, as works contract.

The Hon’ble Bombay High Court delivered a judgment as reported in (51 VST 168), wherein rejecting arguments of the builders and developers, the agreements under MOFA were considered to be works contract transactions and the levy of tax on such transactions was held to be constitutionally valid.

Judgment of Larger Bench of Supreme Court in Larsen & Toubro Limited and another vs. State of Karnataka and another & Others.

The K. Raheja judgment came to be analysed by the Hon’ble Supreme Court in case of Larsen & Toubro Limited and another vs. State of Karnataka and another (17 VST 460)(SC), Hon’ble Division Bench did not concur with the judgment in K. Raheja and referred the matter to Larger Bench. The Hon’ble Larger Bench has resolved the above controversy vide recent judgment in Larsen & Toubro Limited vs. State of Karnataka, Civil Appeal No. 8672 of 2013 dated 26.9.2013. Alongwith the above, Larger Bench also considered judgment of MCHI (51 VST 168), as it was also before Supreme Court out of an SLP filed by MCHI.

Out come of Larger Bench Judgment
The Hon’ble Supreme Court has analysed the arguments of both the sides. The main argument of the developers was that the contract involving two elements only i.e. goods and services, can be considered as ‘works contract’ under above article 366 (29A)(b). However, the Hon’ble Supreme Court has held that there is no such limitation and a contract involving a third element like land can also be considered as a works contract.

A further argument that was advanced was that there is transfer of immovable property and not transfer of movable goods. In this respect also, the Hon’ble Supreme Court rejected the argument observing that even if the goods used get transformed into immovable property and such immovable property get transferred to the buyer, still it will be taxable ‘works contract’ for sales tax purposes. However, the Hon’ble Supreme Court observed that while taxing value of goods in the contract, no portion relating to immovable property should get taxed.

The Hon’ble Supreme Court has also observed that the contract will commence from the stage when the agreement is entered into with the prospective buyer. In other words, the work completed prior to such agreement will not be taxable.

It is also held that if the sale is of completed premises then it will not be covered by the sales tax laws.

In relation to MVAT Act, 2002, the Hon’ble Supreme Court has observed that rule 58(1A) of the MVAT Rules, 2005 should be relooked at by the government and the effect should be clarified by the government. It is also observed that double taxation should be avoided.

Conclusion

The above judgment will have far reaching effect. It has expanded the scope of ‘works contract’ transactions which can be subjected to sales tax. The Bombay High Court judgment in case of MCHI was relating to agreement under MOFA, whereas the observations of the Supreme Court suggest that other contracts though not falling within the ambit of MOFA can also be covered under the works contract category.

In relation to MVAT Act, 2002 the Hon’ble Supreme Court has directed clarification of rule 58(1A), and has also directed to ensure that there is no double taxation. Under the above circumstances, the builders and developers in Maharashtra should wait till such clarification is given by the government, as for proper discharge of liability such clarification is absolutely essential.

Nirav Shah

Software Development Charges — whether liable to VAT or Service Tax?

Introduction
When there are two different authorities to levy tax of a similar nature, there is bound to be a controversy. And one such controversy going around is whether development charges for software are liable to VAT or service tax? The issue is debatable as both the authorities consider the same under their jurisdiction.

There are certain judgments, mainly about aspect theory, under which the respective authorities under VAT and service tax consider some aspect of the transaction as liable to tax under their respective law and try to levy tax. This results in overlapping and also leads to double taxation of the same transaction. However, without making any attempt to analyse the theory of double taxation, etc., let’s try to understand the correct position of taxation of software development charges.

Software, whether goods?
The first issue in relation to taxation of software is whether softwares are goods. This issue has already been settled by the Supreme Court. Reference can be made to the judgment of the Supreme Court in the case of Tata Consultancy Service v. State of Andhra Pradesh, (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, 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 sales tax. The submission of Mr. Sorabjee that this authority is not of any assistance as ‘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.”

Thus, in relation to ready software whether canned or uncanned, the Supreme Court has observed that they are goods and hence can be subjected to sales tax including VAT, as presently levied.

However, the issue still remains whether all uncanned softwares are liable to VAT. There may be two situations under the above category of uncanned software:

One is that uncanned software may be developed for a particular customer as per his specifications. The software developer reserves all IPR including copyright in the said software unto himself. He will transfer the same to the customer after the software is ready against consideration. The transaction satisfies the test laid by the Supreme Court.

The other situation is that the customer while putting the order for development of software may reserve his copyright and IPR in the said software to be developed unto himself right from original stage of development of the software. Under the above circumstances it can be said the developer is not developing any software as his property which he can transfer to the customer. In this case the software coming into existence belongs to the customer as copyright lies with him as and when the software is being developed. Therefore the software developer can be said to be rendering services for development and not selling any software. In such a case there is no justification for levy of VAT. If at all, applicable service tax may be leviable, but not VAT.

This issue has been decided now by the Karnataka High Court in the case of Sasken Communication Technologies Ltd. v. The Deputy Commissioner of Sales Tax, DVO-5 (W.A. Nos. 90-101/2011 dated 15-4- 2011). In this case also similar issue was involved. The dealer M/s. Sasken Communication Technologies Ltd. developed software for its customers. However, as per agreement the copyrights and IPR in the said software belonged to the customer right from original stage of development. The Karnataka High Court held that since the copyright belonged to the customer right from the beginning, the software coming into existence after development belonged to the said customer and therefore there is nothing in the hands of the developer to transfer the same to the customer. In other words there was no sale of goods against consideration so as to attract VAT. This was nothing but rendering of development services for software.

The High Court has observed as under about the nature of transaction:

“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 or 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 and prosecute 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.”

The above observations of the High Court entirely cover the debatable issue. The parties can now very well decide whether the transaction of development of software will be covered by VAT or service tax based on ownership in the copyright and IPR. We hope that the controversy will rest here and the future transactions will be free from any dispute.

A market is never saturated with a good product, but it is very quickly saturated with a bad one.
— Henry Ford

Nirav Shah

Penalty u/s.29(8) of MVAT Act vis-à-vis High Court judgment

VAT

S. 29(8) about levy of
penalty was amended from 1-7-2009. The amended S. 29(8), from 1-7-2009, reads as
under :

“29. Imposition of penalty
in certain instances :

(8) Where, any person or
dealer has failed to file within the prescribed time, a return for any
period as provided in S. 20, the Commissioner shall impose on him, a sum of
rupees five thousand by way of penalty. Such penalty shall be without
prejudice to any other penalty which may be imposed under this Act.”

It appears that from
1-7-2009 the quantum of penalty is sought to be fixed and also to make it
mandatory. Simultaneously, by amendment in S. 85(2) (b-2) the above penalty
order is made non-appealable. The learned Commissioner of Sales Tax has issued
Circular No. 22T of 2009, dated 6-8-2009 in which the implications of the above
amendments are explained and amongst others it is mentioned as under :

“3.
Penalty for non-filing or late filing of
returns — S. 29(8) is substituted :

(e) Amended sub-section
provides mandatory penalty and is in addition to any other penalty provided
under the Act.

(f) The officer shall
not have any discretion whether to levy or not to levy the penalty as also
to decide the quantum of penalty.

(g) The penalty order
passed under this Section is made non-appeallable; therefore there shall be
no appeal against the levy of penalty. [S. 85(2) amended]

(h) Needless to state
that since the levy of penalty for non-filing or late filing of returns has
become mandatory; there is no need to issue the show-cause notice before the
levy of such a penalty.”

The above mandatory levy of
penalty, in all circumstances, without right of appeal and without hearing
opportunity was agitating the minds of traders/dealers. On the behest of Tax
Consultants Association, Sangli and Federation of Association of Maharashtra,
writ petitions in case of Sanjay Dresses and Ravindra Udyog were filed before
Hon. Bombay High Court. In both the writ petitions the following challenges were
made :

(1) The S. 29(8) is
ultra vires the Constitution. It does not allow discretion in the matter of
levy of penalty. There can be a number of instances where delay will be due
to circumstances beyond control of the dealer, like medical emergency,
computer failure and others. The penalty amount of Rs.5000 may also exceed
the tax amount payable in return, e.g. tax payable may be Rs.100 but penalty
would be Rs.5000. The penalty is not commensurate to the object to be
achieved. This will be confiscatory as well as amounting to levy of tax on
income rather the penalty.

(2) That the order is
not appealable was also challenged. The penalty, being discretionary, the
mechanism of appeal is necessary.

(3) The penalty cannot
be levied without hearing. It is against the principles of natural justice.
Even assuming that the penalty is mandatory, still it may be levied in case
where return is not due, or the return is filed but not noticed by the
Department, etc., if levied without hearing. Therefore the hearing is a
must.

(4) The penalty be
deleted/reduced on the facts of the case.

When the above writ
petitions came up for hearing, the High Court was of the opinion that since
penalty order is passed without hearing, it is bad in law. At this juncture the
learned advocate on behalf of the Department tried to argue that post-levy
remedy is available like rectification. However when the High Court pointed out
that the hearing is required before the penalty order is passed, the learned
advocate conceded that the hearing is necessary before levy of penalty u/s.29(8)
and requested to set aside the order and remand back the matter. It is at this
point the High Court passed the order (Sanjay Dresses W.P. 1705 of 2009, dated
6-8-2010 and Ravindra Udyog W.P. 1214 of 2010, dated 6-8-2010, one of which is
reproduced below). When pointed out to the High Court that there are other
challenges, the High Court has specifically stated in the order that even after
passing a speaking penalty order, if there is a grievance, the petitioner can
again file a writ petition. Thus the other challenges are kept open to be dealt
with in subsequent matter, which may take place later.

“In the High Court of
Judicature at Bombay

Civil Appellate Jurisdiction
— Writ Petition No. 1705 of 2010

M/s. Sanjay Dresses …
Petitioner

The State of Maharashtra …
Respondent

C. B. Thakar for the
petitioner.

V. A. Sonpal, ‘A’ Panel
counsel for the respondent.

Coram : V. C. Daga and S. J.
Kathawalla, JJ.

Dated : 6th August 2010.

P.C. :

Perused petition.

Heard learned counsel for
the petitioner and Mr. Sonpal, learned counsel for the respondent.

2. Mr. Sonpal, during the course of hearing, urged that the impugned order levying penalty be set aside and the matter be remitted back for consideration afresh so as to enable the Department to comply with the requirement of principles of natural justice. He further submits that fresh notice will be issued to the petitioner indicating the grounds on which the Department proposes to levy penalty. That the petitioner would be given an opportunity to reply the same and after considering the reply and affording personal hearing to the petitioner a reasoned order would be passed dealing with all the contentions raised by the petitioner.

3. In the above view of the submission, learned counsel for the petitioner seeks permission to withdraw this petition reserving his right to challenge adverse order on the grounds as may be available in law including the grounds raised in this petition. All contentions of the parties on merits are kept open.

4. Petition stands disposed of as withdrawn in terms of this order with no order as to cots.
(S. J. Kathawalla, J.) (V. C. Daga, J.)”

Conclusion :

1) The other challenges like Constitutional validity, and non-appealability are still open issues before the High Court.

2)Since the Department itself has accepted that hearing is necessary before levy of penalty, the said principle will be required to be followed in case of other dealers also. The Department cannot take a stand that hearing is required to be given only to those who come before the High Court and not to others, though principle of giving hearing before levy of penalty u/s.29(8) is accepted. It will be an absurd contradiction and also discriminatory. If any other dealer approaches the High Court on the same ground, surely it will be difficult for the Department to save the situation in view of their own admission about giving hearing.

Follow-up action in case of penalty orders already passed:

Since 1st July 2009, a large number of penalty orders have already been passed without giving hearing. Such dealers can now file Form 307 (Rectification) and ask for cancellation of such orders, as bad in law. The Department will be required to cancel the same, give hearing and then pass reasoned orders, if required.

It may be noted that, in several cases, in the matters of levying penalty, the courts and tribunals have ruled that penalty cannot be levied if there is a genuine reason for the delay.

Nirav Shah

Inter-State works contract vis-à-vis application of composition scheme provided under local act :

VAT

Inter-State works contract vis-à-vis application of
composition scheme provided under local act :

After 11-5-2002 inter-State works contracts are also liable
to tax under the CST Act. A question arises about deciding the value of goods
for levy of tax. Since works contract is a composite contract, involving supply
of goods as well as rendering of services, it becomes necessary to determine the
value of goods from the composite value for levy of tax under the CST Act.
Normally the said value is to be decided as per the guidelines given by the
Supreme Court in case of M/s. Gannon Dunkerly and Co. (88 STC 204) (SC). For
ready reference the relevant portion of the judgment is reproduced below :

“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 there-from 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;

(d) charges for obtaining on hire or otherwise machinery
and tools used for execution of the works contract;

(e) cost of consumables such as water, electricity, fuel,
etc., used in execution of the works contract the property in which is not
transferred in the course of execution of a works contract; and

(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;

(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.”

However to decide the value of goods, as per above
guidelines, is sometimes very difficult depending upon complexity of the
contract. Under Local Sales Tax Laws, a standard deduction method (i.e.,
abatement at fixed percentage) is provided for giving deduction for labour
portion and the balance is considered as value of the goods. Under the CST Act,
enabling provision for prescribing standard deduction rates is made by way of
proviso to S. 2(h) (definition of ‘sale price’) of the CST Act. However, till
today no such standard deduction rates are prescribed. Therefore, a question
arises as to whether a dealer can opt for such deduction rates provided under
the Local Act, for deciding the value of goods under the CST Act. Though the
issue was debatable, but, after the judgment of the Supreme Court in the case of
Mahim Patram (6 VST 248)(SC) it has became fairly clear. In light of the
observations made by the Supreme Court, it is felt that determination of value
of goods in a works contract is a part of assessment procedure and since by S.
9(2) of the CST Act the provisions of the Local Act for assessment are made
applicable to the CST Act also, the provisions about standard deduction can also
apply for determination of taxable value of works contracts under the CST Act,
1956. However after taking deduction of labour charges on standard deduction
basis, the further issue is about dividing the turnover in relation to
particular slab rates, like liable to 4%/12.5%, etc.

The determination of tax rate for a particular turnover under
the CST Act is provided u/s.8 of the CST Act, 1956. There is no other provision
under the CST Act for deciding the rate of tax. Therefore, though one can
determine the value of the goods, the division of the same in different slab
rates is again a complex issue. Under the Local Act, to avoid the difficulties
of reducing contract value by labour charges as well as deciding taxable value
into different slab rates, etc., the composition schemes are provided. Under
such composition schemes the dealer can pay the tax on total contract value
(lump sum) at prescribed percentage. Thus, such composition schemes make
taxation of works contracts easier and simpler. For example, under the MVAT Act,
2002, two composition schemes for works contracts are provided. Under one of the
schemes, on notified construction contract, a dealer can pay at the rate of 5%
of the total contract value, whereas under the other general scheme, a dealer
can pay at the rate of 8% of the total contract value. Such schemes are normally
optional and they are in lieu of tax payable as per normal rates under the Local
Act. As under such schemes there is no determination of rate of tax as per S. 8
of the CST Act, it was felt that such optional composition schemes cannot apply
to inter-State works contracts. S. 8 provides for deciding rate of taxes as per
legal provisions and there is also no alternative composition scheme under the
CST Act for paying tax on lump sum contract value.

However, it appears that the said issue is also now resolved
by the Central Sales Tax Appellate Authority (CSTAA). This authority, which is
set up to determine inter-State tax disputes under the CST Act, when two or more
states are involved, is constituted under the provisions of the CST Act, 1956.
The said authority has recently decided the above issue in the case of
Commissioner of VAT v. State of Haryana, (23 VST 10). In this case the issue
was about the nature of contract as well as determining assessable value of the
contract. The facts were that the contractor had received a contract from the
Government of New Delhi for improvement of roads, etc. For completing the said
work the contractor transported bituminous mixture (known as dense asphalt
concrete) from Haryana to New Delhi. The New Delhi authorities wanted to tax the
transaction as local sale. The Haryana Government protested the same on the
ground that it is inter-State sale from Haryana liable to tax in Haryana under
the CST Act, 1956. CSTAA agreed to this proposition of the Haryana Government.

The next issue under the said judgment was about discharging
of the CST liability on the said contract in Haryana. In Haryana, there was
composition scheme and a contractor could opt for the same. The CSTAA observed
as under :

“Just as in the Ll.P, Trade Tax Act, in the Haryana Value Added Tax Act, 2003 too, there are provisions dealing with the manner of determination of sale price of goods involved in a works contract. The relevant provisions are the following:

The definition of ‘sale’ includes consideration for the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract [vide (ze) of clause (ii)]. Clause (zg) defines ‘sale price’. Explanation thereto which is relevant for our purpose reads thus:

“Explanation (i): In relation to the transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract, sale price shall mean such amount as is arrived at by deducting from the amount of valuable consideration paid or payable toa person for the execution of such works contract, the amount representing labour and other service charges incurred for such execution, and where such labour and other service charges are not quantifiable, the sale price shall be the cost of acquisition of the goods and the margin of profit on them prevalent in the trade plus the cost of transferring the property in the goods and all other expenses in relation thereof till the property in them, whether as such or in any other form, passes to the contractee and where the property passes in a different form shall include the cost of conversion.”

Thus the manner of ascertainment of sale price has been specified in Explanation (i). Then, Rule 49 of the Haryana Value Added Tax Rules, 2003 provides for a lump sum scheme of tax payment in respect of works contract. The framing of such rule is in accordance with S. 9 of the HVAT Act. It reads thus:

“A contractor liable to pay tax under the Act may, in respect of a works contract awarded to him for execution in the State, pay in lieu of tax payable by him under the Act on the transfer of property (whether as goods or in some other form) involved in the execution of the contract, a lump sum calculated at four percent of the total making an application to the appropriate assessing authority within thirty days of the award of the contract to him, containing the following particulars ….

and appending therewith a copy of the contract or such part thereof as relates to total cost and payments.”

Thus, the procedure for arriving at the sale price in relation to works contract has been put in place in the HVAT Act which was enacted in 2003 by repealing the Haryana General Sales Tax Act, 1973. It is, therefore clear that the ratio of the decision of the Supreme Court in Mahim Patram case (2007) 6 VST 248 applies with equal force to the present case.”

In light of above observations it appears that the CSTAA has considered both, deduction method as well as composition scheme, as applicable to the CST Act, 1956. Therefore, a dealer can now safely opt for composition scheme under the CST Act also for discharging tax liability on inter-State works contracts. This may be useful to dealers in discharging liability on inter-State works contract by opting for a simple method.

Nirav Shah

Liability of Builders — “K. Raheja” explained

VAT

A controversy is floating around as to whether Builders or
Developers are liable to sales tax (VAT) on sale of premises such as flats,
offices, etc.

It is well understood that sales tax (VAT) may be levied on
sale of goods and not on sale of immovable properties, and the transactions of
sale of flats, offices, etc. are in the nature of sale of immovable properties,
hence the same are outside the purview of sales tax laws. However, there may be
a situation where the builder or developer may commence construction activity
for building, etc. and while the construction is on, the builder may enter into
an agreement with the prospective buyer for sale of premises. These are normally
referred to as ‘Under-Construction Contracts’. The controversy is about the
above transactions. The Revenue Department is of the opinion that the work
carried on by the builder/developer, after entering into such Under-Construction
Contract, is liable to sales tax as works contract. The argument is that since
there is an agreement for sale of premises and the work, using the property of
the builder, is done after such agreement, the property used in such work can be
said to have been transferred in the execution of works contract and hence the
liability will accrue. In fact this was the issue taken up by the Sales Tax
Department in Karnataka in case of K. Raheja. The matter went to the Supreme
Court.

The Supreme Court delivered its judgment in 2005 in the case
of K. Rehaja Construction, which is reported in 141 STC 298. Based on this
judgment, the Department is taking a view that all under-construction agreements
are liable to sales tax as works contracts. A similar view is also tried to be
adopted by the Sales Tax Department of Maharashtra as is evident from Circular
issued by the Commissioner of Sales Tax bearing No. 12T of 2007, dated 7-2-2007.
In the ‘Sales Tax Corner’ of BCAJ (March, 2007), we have analysed the position
and observed that in spite of the judgment in the case of K. Raheja, all the
under-construction agreements cannot be liable to sales tax. The distinguishing
features in K. Raheja were also highlighted. In the case of K. Raheja, there
were in fact two separate agreements, one for sale of land and other for
construction, though embodied in one agreement. It is under these circumstances,
the Supreme Court observed that there is a separate sale of land and a separate
contract for construction. Therefore it was held by the Court that it is a works
contract liable to sales tax. In light of the above observations of the Supreme
Court it was pointed out that if in the under-construction contract the price of
land is not mentioned separately, then the judgment in the case of K. Raheja
cannot apply.

Recently the Gauhati High Court had an occasion to deal with
similar controversy in the case of Magus Construction Pvt. Ltd. and Others v.
Union of India, (15 VST 17). The issue was in relation to service tax on
builders. While deciding the issue, the High Court has dealt with the effect of
the judgment of K. Raheja. A gist of the judgment is as under :

The petitioner was involved in development and sale of
immovable properties like, flats, etc. They entered into ‘flat purchase
agreements’ with various purchasers, wherein the petitioner-company allotted and
sold flats to the purchasers. The petitioner-company entered into an agreement
for sale of flat, which was registered. The Service Tax Department issued notice
on the ground that the petitioner- company is providing ‘Commercial or
Industrial Construction Service/Construction of Complex Service’. The
petitioner-company filed writ petition before the High Court and contended that
the transaction between the petitioner and the flat purchaser was purely a
transaction of sale of flat (i.e., sale of immovable property) and not a
contract for rendering of service of any nature whatsoever.

The High Court observed that in the case of
petitioner-company, the petitioner was not shown to have undertaken any
construction work for and on behalf of proposed customer and the title in the
flat passed to the customer only on execution of sale deed and registration
thereof. Until the time the sale deed was executed, the title and interest
including the ownership and possession in the construction made remained with
the petitioner. The construction activities which the petitioner had been
undertaking were in respect of the petitioner’s own work and it was only the
constructed work which was sold by the petitioner-company to the buyer, who
might have entered into agreement for sale before construction had actually
started or during the progress of construction activity. Any advance made by a
prospective buyer was against the consideration for sale of flat to the
prospective buyer and not for the purpose of obtaining services from the
petitioner. Under the above circumstances, the Gauhati High Court held that the
transaction cannot be liable to service tax.

The same principle will apply even for deciding the liability
under sales tax laws. As there is no element of rendering services while
selling the flat, similarly there cannot be sale of material, as ultimately in
such an agreement the flat, an immovable property is sold.

Amongst others, in relation to the judgment of K. Raheja, the
High Court observed as under :

34. Referring to K. Raheja Development Corporation v. State of Karnataka Assistant, (2005) 141 STC 298 (SC); (2005) 5 RC 105; (2005) 5 SCC 162, learned Assistant Solicitor-General has submitted that when the construction activities are carried on by a person by creating its own agency, it would amount to construction services. There can be no doubt that when a person creates an entity and engages such entity for its own constructional activities for the purpose of construction of residential complex, not for itself but for others, it would amount to construction service. What may, however, be pointed out is that the decision of the Apex Court in K. Raheja Development (2005) 141 STC 298 (SC); (2005) 5 SCC 162, which the respondents rely upon, is not applicable to the case at hand, inasmuch as this decision was rendered on the facts of its own case. In the present case, the petitioner-company is not shown to have under-taken any construction work for and on behalf of proposed customer / allottees and the title, in the flat/ apartments so constructed, passes to the customer only on execution of sale deeds and registration thereof. Until the time the sale deed is executed, the title and interest, including the ownership and possession in the constructions made, remain with the petitioner-company. The payments made by prospective purchasers in instalments, are aimed at facilitating purchase of the flat/premises by these probable purchasers, so that they may not be required to pay whole consideration at a time. From the condition so incorporated in the relevant agreement for sale, it cannot be inferred that the petitioner company is making construction for and on behalf of the probable allottees or purchasers.

35. Further, in K. Raheja Development Corporation (2005) 141 STC 298 (SC); (2005) 5 RC 105; (2005) 5 SCC 162, the Apex Court was considering the issue relating to ‘sales tax’ and the issue therein was not at all related to ‘service tax’. While interpreting the provisions of ‘sales tax’ under the Karnataka Sales Tax Act, 1957, the Apex Court held in K. Raheja Development Corporation (2005) 141 STC 298 (SC); (2005) 5 RC 105; (2005) -I 5 SCC 162, that the definition of ‘works contract’ given under the Finance Act, 1994 is very wide and is not restricted to the ‘works contract’ as commonly understood, i.e., a contract to do some work on behalf of someone else. The Apex Court, therefore, held as under (at page 302 of STC) :

“…..The definition would therefore take within its ambit any type of agreement wherein construction of a building takes place either for cash or deferred payment, or valuable consideration. To be also noted that the definition does not lay down that the construction must be on behalf of an owner of the property or that the construction cannot be by the owner of the property. Thus even if an owner of property enters into an agreement to construct for cash, deferred payment or valuable consideration a building or flats on behalf of anybody else it would be a works contract within the meaning of the term as used under the Finance Act, 1994./1

36. In K. Raheja Development Corporation (2005) STC 298 (SC); 2005 5 RC 105; (2005) 5 SCC 162, the agreement provided that K. Raheja Development Corporation, as developers, on its own behalf, and also as developer for those persons, who would eventually purchase the flats, do the construction works. Thus, K. Raheja Development Corporation was not only undertaking construction work on its own behalf, but also on behalf of others who were prospective buyers. It is, in such circumstances, that K. Raheja Development Corporation was treated to have been doing the ‘works contract’. In the present case there is no material to show that the petitioner-company constructs the flat/ apartments on behalf of the prospective allottees and, hence, it cannot be said that the constructions done by the petitioner-company are the constructions undertaken by the petitioner-company for and on behalf of their prospective buyers/allottees. Thus, there is no ‘service’ rendered by the petitioner-company to the prospective allottees. Similar view has been taken by the Allahabad High Court in Assotech Realty Private Limited v. State of Uttar Pradesh, (2007) 8 VST 738, wherein the Court has held as under (atpage 759):

“……In the present case, we find that the petitioner is constructing the flats/ apartments not for and on behalf of the prospective allottees but otherwise. The payment schedule would not alter the transaction. The right, title and interest in the construction continue to remain with the petitioner. It cannot be said that the constructions were undertaken for and on behalf of the prospective allottees and, therefore, the constructions in question undertaken by the petitioner would not fall under clause (m) of S. 2 read with S. 3F of the Act and are outside the purview of the provisions of the Act. In other words, they cannot be subjected to tax under the Act and the action, in imposing tax on such constructions treating them to be works contract, is wholly without jurisdiction ….

If the above observations are read along with the detailed facts narrated in the Supreme Court judgment, it transpires that if the land price is shown separately, then a presumption can be made that there is sale of land and construction thereon is a separate transaction. This will amount to carryon work on behalf of others i.e., on behalf of prospective buyers. Therefore, where there is no such separation, the ratio of the above judgment will apply and there cannot be any liability under sales tax as works contract. Though one can wait for a direct judgment on the issue, the above judgment will be useful for understanding the effect of K. Raheja Construction and for advancing the contention that builders/ developers cannot be liable to sales tax in relation to each and every under-construction agreement. The liability will depend upon the facts of each case based upon terms of agreement, etc.

Nirav Shah

Branch Transfer of Parts, Components vis-à-vis Inter-State Sale

The issue whether transfer of goods from head office to a branch office is a branch transfer or inter- State sale is always highly debatable. As per section 6A(1) of the CST Act, 1956, when the transfer is not pursuant to a pre-existing contract of sale, it will amount to a branch transfer. However, whether the movement from head office to a branch or from one branch to another branch in another State is due to the pre-existing sale contract or not is a contentious issue and has to be decided on facts of the case. There are number of judgments, which throw light on the above subject.

Branch transfer of goods can be of two types, (a) finished goods and (b) intermediatory goods. In case of finished goods, there can be factual position that the goods have been moved because of a pre-existing sale order and hence it may amount to inter-State sale. However, in respect of intermediatory goods like parts and components, the situation may be different. Some aspects about transfer of components and parts can be examined as under:

Reference can be made to judgment of the Andhra Pradesh High Court in the case of Bharat Electronics Ltd. v. Deputy Commissioner (CT), No. II Division, Vijayawada & Another, (46 VST 179) (AP). The facts in this case are that the unit of the above appellant dealer at Machilipatnam in Andhra Pradesh dispatched certain materials to its branch in another State. The goods dispatched were manufactured goods at Machilipatnam, like night-vision devices, etc. The said goods were to be incorporated in the equipment manufactured at the branch in another State (where the goods were dispatched) and the finished goods were supplied by that branch to the customer. On the sale of finished goods, tax was discharged in the said State of sale. However, the Andhra Pradesh authorities disallowed branch transfer claim on the ground that such transfer was connected with pre-existing sale order and hence it G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT was inter-State sale. The issue was contested before the Andhra Pradesh High Court.

The High Court examined the nature of inter-State sale and its requirements. The High Court referred to observations in the case of K.C.P. Ltd. (Ramakrishna Cements) 1993 (88 STC 374) (AP) and reproduced following portion:

“that the company may have several units or divisions located at different places engaged either in the same line of manufacture or trading or in different manufacturing or trading activities. Normally, the units or divisions will have no separate identity of their own, much less a distinct legal entity. There may be separate establishments, separate planning and separate management, but these aspects by themselves do not detract from the basic characteristic of communion with the corporate body that had created these units or divisions. They can claim no independent existence apart from the company itself. The property of these units or divisions is legally held by the company. The profits generated by the units formed part of the company’s income and would go to the benefit of the general body of shareholders of the company. So also, the liabilities or losses incurred by the individual units, in the ultimate analysis, would have to be borne by the company. It was the company that could sue for the recovery of property or dues or be used for the outstandings due on account of dealing of the units. A single balance sheet was prepared by the company in respect of all the units and divisions owned and controlled by the company . . . .”

The Andhra Pradesh High Court also referred to law laid down by the Supreme Court in the case of Bharat Heavy Electricals Ltd. (102 STC 345) (SC) and reproduced the following observations:

“The Tribunal missed to note that the plant and equipment which is the subject-matter of contract such as boiler package or turbo-generator package is incapable of being manufactured and despatched as a finished unit. Necessarily, the equipment/components or assembled units have to be despatched to the customer’s site and installed there. The contract does not contemplate the dispatch of a readymade finished product to the customer’s place for instantaneous use in the power-plants, etc. On the other hand, it is clear from the terms of the contract, especially the price payment clause, that the components and parts forming part of the larger package should be supplied from time to time by BHEL. It is not at all possible to transfer the finished product such as ‘boiler package’ at a time. It may be noticed that the Tribunal itself has given a different reasoning for excluding the inter-unit transfers from the taxable net at paragraph 29, sub para 3. The Tribunal rightly puts it on the ground that the article transferred from the petitioner unit to the executing unit (Trichy, etc.) loses its identity as it is incorporated into a larger component or equipment. There is yet another closely allied reasoning to say that the goods sent to Trichy or other executing unit does not stand on the same footing as those sent direct to the customer’s site. In the case of the former, there is interruption of movement and the snapping of inextricable bond that should exist between the inter-State movement and the contract of sale. In regard to the goods sent to Trichy unit (or other executing units), the dispatch therefrom to inter-State customer takes place after assembling or processing and it is the sole concern of that unit. Trichy unit can even retain the goods for itself and divert them for any other use. There is nothing to indicate that the goods sent by Hyderabad unit to Trichy or other units are earmarked for any particular contract. The Hyderabad unit had no inkling of their ultimate utilisation and whether, how and when the goods will be moved to the customer’s place by Trichy unit. As far as Hyderabad unit is concerned, it is a case of pure and simple stock transfer to another unit under ‘F’ forms. At best, the inter-State movement, or to put it in other words, the inter-unit movement to Trichy can only be said to be for the purpose of fulfilling the contract, but not in the course of fulfilment of the contract of sale, a distinction recognised in the Tata Engineering & Locomotive Co.’s case (1971) 27 STC 127 (SC); AIR 1971 SC 477; (1971) 2 SCR 849. The movement to Trichy in our opinion is not a necessary consequence of the contract, nor is it incidental to the contract that goods of this nature should first be moved to Trichy. As already observed, there is no inextricable and uninterrupted bond between the contract and the movement of goods to Trichy or other sister units of the petitioner.”

After noting the above legal position, the High Court observed as under about the facts of the particular case before it:

“It is only if the goods, which move from one State to another, are sold as they are and are not incorporated in, or do not form part of, other goods would the question of such transfer of goods attracting levy of tax under the CST Act, as an inter-State sale, arise. It is not in dispute that the goods supplied by the Machilipatnam unit, to other units of BEL located outside the State, are merely components of, and are incorporated in, the goods manufactured by other units of the petitioner company locate outside the State of A.P., and the goods transferred by the Machilipatnam unit are not sold to the Armed Forces as they are. The transfer of goods by the Machilipatnam unit, to other units of the petitioner-company located outside the State, fall within the ambit of section 6A(1) of the CST Act, and are not inter-State sales exigible to tax u/s.6 of the Act. The order of the first respondent, holding that the transfer of such components by the Machilipatnam unit to other units of the petitioner-company situated outside the State constitutes inter-State sales under the CST Act, must therefore be quashed.”

Thus, the legal position emerges is that if the goods transferred are supplied as it is to the customer and link between transfer and such sale is established, then it may amount to inter -State sale from the moving State. However, if the transfer is of components and parts, then even if they are in relation to pre-existing order of finished goods in which such parts and components are to be incorporated, there is no possibility of inter-State sale of such parts and components from the moving State. This also clarifies the position that the movement should be linked with the ultimate goods to be supplied to the customer and not with the intermediatory goods which may be incorporated in the ultimate goods to be supplied. This judgment will certainly be a guiding judgment on the above-referred issue.

Nirav Shah

Sale Price in Banquet Hall under MVAT Act, 2002

Introduction
Under Maharashtra Value Added Tax Act, 2002, (MVAT Act), tax is levied on the ‘sale price’. There are situations where the transactions are composite and only part of it would be liable to VAT. In case of Works Contract the situation is clear due to judicial pronouncements. However, there are new types of transactions coming up for determination of ‘sale price’. One such instance is sale price, for the purpose of MVAT Act, in case of charges for Banquet Hall. Banquet halls normally arrange programs as per requirement of clients. Entire arrangement includes various services including serving of food and drinks. For example, if a marriage function is arranged in a banquet hall, then there will be arrangement for a stage, furniture, decoration, music, etc. and also supply of food and drinks.

Banquet Hall, a composite transaction
In case of banquet hall, the service provider i.e. hotels etc., are liable to pay service tax. Simultaneously there being supply of food and drinks, VAT is also applicable. An issue arises as to on what amount VAT is payable. One view can be that the entire charges are liable to VAT. Other view can be that only that portion of price, which is relating to food and drinks, can be liable to VAT.

Determination of disputed question (DDQ) in caseof Tip Top Enterprises
The dealer, M/s. Tip Top Enterprises, filed an application for determination, before the Commissioner of Sales Tax, to get the issue of ‘sale price’ for banquet hall under the MVAT Act decided. In the DDQ dated 25-05-2009, the learned Commissioner of Sales Tax, rejecting all the arguments of the dealer, held that the whole amount charged by the dealer (banquet hall) is liable to VAT.

Decision of Tribunal in above case
The matter went to Maharashtra Sales Tax Tribunal by way of appeal no. 41 of 2009. In the appeal, on behalf of appellant, following arguments were reiterated.

a) Referring to definition of ‘sale price’ in MVAT Act which reads as under:

“Section 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,” it was submitted that the amount received against sale/supply of goods only can be considered and not the amount received for services as the ‘sale price’.

b) As per the definition of ‘sale’, the supply of food is deemed to be sale. The said definition of ‘sale’ is as under in section 2(24) of MVAT Act, 2002:

“Section 2 (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;

iii. a delivery of goods on hire-purchase or any system of payment by installments;

iv. the transfer of the right to use any goods or any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

v. the supply of goods by any association or body of persons incorporated or not, to a member thereof or other valuable consideration;

vi. the 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 made or given for cash, deferred payment or other valuable consideration:”

Accordingly, it was submitted that in a banquet hall transaction, only supply of food and drinks part is ‘sale’.

c) Relying upon judgment of Hon. Supreme Court in case of Builder Association of India vs. Union of India (73 STC 370), the above argument was reiterated, more particularly citing the following observation.

“The latter part of clause (29-A) of article 366 of the Constitution makes the position very clear. While referring to the transfer, delivery or supply of any goods that takes place as per sub-clauses (a) to (f) of clause (29-A), the latter part of clause (29-A) says that “such transfer, delivery or supply of any goods” shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.”

Accordingly, it was submitted that under Article 366(29A)(f) only supply of goods is deemed to be a sale which can be subject matter of sales tax and not the total price of transaction. Therefore, it was urged that the levy on total amount was unconstitutional.

d) Based on judgment in case of Imagic Creative P. Ltd. (12 VST 371(SC), it was submitted that on the amount on which service tax is paid, VAT cannot be attracted, as both are mutually exclusive.

e) Citing judgment in case of Cap ‘N’ Chops Caterers vs. State of Haryana (37 VST 226) (P & H), it was submitted that the banquet transaction is in the nature of works contract and can be liable to the extent of goods value and service portion cannot be taxed.

f) Reliance was placed on the judgment in case of Bharat Sanchar Nigam Ltd. (145 STC 91) (SC). In this judgment Hon. Supreme Court has observed that the receipts towards hotel activity are divisible.

g) Reliance was also placed on following observation of Hon. Supreme Court in case of T. N. Kalyan Mandpam (135 STC 480)(SC).

“42. In regard to the submission made on article 366(29A)(f), we are of the view that it does not provide to the contrary. It only permits the State to impose a tax on the supply of food and drink by whatever mode it may be made. It does not conceptually or otherwise include the supply of services within the definition of sale and purchase of goods. This is particularly apparent from the following phrase contained in the said sub-article “such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods”.

Contentions of the Department
a) Relying upon judgment of Hon. Supreme Court in case of K. Damodarsamy Naidu [(2000) (117 STC 1), it was contended that the whole amount is liable to VAT. In this judgment, the Hon. Supreme Court was considering sale price in case of Restaurant.

b) Department also relied upon judgment of Bombay High Court decision in East India Hotels Ltd. (99 STC 197). In this case the restaurant was claiming reduction from sale price on account of luxuries provided in restaurant like AC facility etc., on the ground that they are towards providing extra facilities. However, the Hon. High Court has held that the whole price is liable to sales tax.

Conclusion of Tribunal
Hon. Tribunal delivered its judgment in above appeal no. 41 of 2009 dated 23-04-2013 and referred to above arguments as well as looked into the factual position. Tribunal referred to booking documents for banquet hall. It was seen that the hotel has quoted separate charges, towards rent of hall, about food and drinks and decorating etc. The charges towards food and drinks were almost at par with charges for same menu, when provided by hotel, in other than banquet hall.

In view of the above factual and legal position Tribunal held that the sale price for food and drinks will be the price agreed between the parties. In other words, Tribunal disapproved the DDQ, that whole amount towards banquet hall is liable to VAT. As per Tribunal, VAT can be levied on amount towards food and drinks as agreed between the parties. In relation to decoration charges, which were also charged separately in the quotation, Tribunal held that the same items may attract tax as lease transaction.

The above judgment will be useful to avoid double taxation. In absence of such judgment, dealer may become liable to service tax as well as VAT on the same amount. This is not expected, hence, it will certainly give relief from such double taxation.

Nirav Shah

“Goods/Sales Return” – Scope

Introduction

Under Sales Tax laws, the sales effected are liable to tax. However, if there is sales return (also referred to as “Goods return”) then the amount relating to such returns is not liable to tax. However, there are certain time limits for allowing this deduction. For example, under MVAT Act, 2002 and CST Act, 1956 following are the time limits for allowing the claim of ‘goods return’.

Rule 3 of MVAT Rules, 2005

“3. Goods returned and deposits refunded:- The period for return of goods and refund of deposits for the purposes of clauses (32) and (33) of section 2 shall be six months from the date of the purchase or, as the case may be, the sale.”

Similarly, Section 8A (1) (b) of CST Act provides as under:

“Section 8A (1)(b) The sale price of all goods returned to the dealer by the purchasers of such goods,-

(i) Within a period of three months from the date of delivery of the goods, in the case of goods returned before the 14th day of May, 1966.

(ii) Within a period of six months from the date of delivery of the goods, in the case of goods returned on or after the 14th day of May, 1966.

Provided that satisfactory evidence of such return of goods and of refund or adjustment in accounts of the sale price thereof is produced before the authority competent to assess or as the case may be, re-assess the tax payable by the dealer under this Act.”

It can be seen from above, that the total period (time limit) allowed for claim of goods returns is six months. The issue, for consideration herein is, if the goods return is beyond a period of six months, because of valid reasons, whether the claim is tenable. More particularly, such issue arises in relation to medicines where there is date of expiry of the medicines. In normal circumstances, the said dates are beyond the period of six months. In other words, if there are unsold medicines lying with the dealer after the expiry date, such medicines have to be returned, which may be beyond six months. In such a situation, whether the statutory time limits for ‘sales return’ can be ignored and deduction can be allowable.

Recently, Honourable Kerala High Court had an occasion to deal with such an issue. The judgment is in case of Glaxo Smithkline Pharmaceuticals Ltd. vs. State of Kerala (50 VST 486)(Ker). In this case, the medicines were returned by the buyers after the expiry date and such dates were beyond six months. In other words, the sales returns were beyond six months and the assessing authority disallowed the claim. Before the Honourable High Court, the dealer made two fold arguments. It was his submission that either sales returns should be allowed or the sales should be considered as unfructified sales. The High Court, after considering the arguments, gave detailed judgment on the same, observing as follows:

“3. After hearing both sides, what we find is that the petitioner’s claim of sales return was not allowed because the rule does not permit it. What was sold was medicines with potency and what is returned much after sale and second round of sale is medicines, the life period of which is over. Having had a pre-fixed period of potency, it is unlikely that sales return of life expired medicines will be within three months. Manufacture of medicines itself is geared up to patient demand soon after marketing is done. Therefore, when first sales are made, the medicines sold will have beyond three months shelf-life. Therefore, sales returns do not happen within three months of sales. So much so, under the existing rules which permit deduction of sales return only within three months of sale, the petitioner or other medical companies cannot get deduction of sales returns. The Kerala General Sales Tax Act or the Rules do not specifically provide any provision for refund or adjustment of tax paid in respect of sale of medicines which have lost potency at the hands of the dealer and which have been collected and destroyed by the company. The only provision for granting deduction is rule 9(b)(i) which provides for sales return within three months of sale which does not happen, because no medicine sold will have such short-period of three months of shelf-life. The petitioner also has no case that the sales return claimed of shelf-life expired medicines were within three months of the sale by the petitioner and so much so, the claim was rightly rejected in assessment and confirmed by the Tribunal. We do not find any error with the finding of the lower authorities.

The counsel for the petitioner raised an alternate contention that transaction should be treated as unfructified sales and so much so, since there is no time-limit for claiming deduction, the petitioner is entitled to refund of tax paid. This is opposed by the Government Pleader on several grounds.

In the first place, the sale of the item has really taken place from the petitioner to the distributor and from the distributor in turn to the dealer. The fact that the last retail dealer could not sell the medicine with the shelf-life period does not mean that the sale by the petitioner to distributor and in turn to dealer had not taken place. On the other hand, goods reach retail dealers only on second sales and admittedly the petitioner has not directly sold medicines to the retail dealers who returned the goods through distributors.

Therefore, the petitioner’s claim that the sale has not taken effect and on return of the medicines after expiry of the shelf-life, the original sale gets cancelled or frustrated is unacceptable. The practice followed is that shelf-life expired medicines are collected by the company from distributors and destroyed as part of the condition of the marketing to save dealers from loss. In fact, such loss is essentially borne by the manufacturing company, and the dealers or distributors obviously and rightly are not called upon to meet the loss. Further, as a matter of practice, the medicines returned on expiry of shelf-life are not replaced by the petitioner as such. But its value is reimbursed to the distributors through credit notes who in turn issue credit notes to retail dealers. Therefore, it is not a case of return of medicine on expiry of shelf-life and cannot be treated as fructified sales or unfructified sales. So much so, the petitioner’s contention in this regard is also not acceptable.”

Conclusion

It can be seen that statutory provisions apply in spite of genuine difficulties. The claim of unfructified sale is also not maintainable. The legislatures should provide relief in such genuine cases. In fact, in the above judgment, the Honourable High Court has observed for providing necessary statutory relief.

levitra

Nirav Shah

Whether Transfer of Intellectual Property Rights, While Transferring Whole Business, Liable to Sales Tax?

Introduction

Under Sales Tax/VAT Laws , tax is levied on transaction of ‘sale’. ‘Sale’ can be said to have taken place when it fulfills minimum criteria laid down in the Sale of Goods Act. This aspect has also been dealt with by Honourable Supreme Court, in the landmark judgment, in the case of Gannon Dunkerley and Co. (9 STC 353). In respect of ‘sale’ transaction, Honourable Supreme Court has observed as under:

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

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

If the above criteria are fulfilled, there is no doubt that it will be a ‘sale’. However, to come within sales tax net, the further requirement is that it should be in ‘course of business’.

Part/whole transfer of business – vis-à-vis Sale of Intellectual Rights

An issue arises when intellectual rights are transferred to transferee while transferring part or whole of business. In other words, there may be cases where a running division of a business concern may be transferred to other business concern or the whole business concern may be transferred to another entity.

Normally, transfer of division or whole business to other concern does amount to sale. It is a transaction of change in constitution. Reference can be made to determination order in case of Bharat Bijlee Ltd. (DDQ 11/2004/Adm-5/54/B-2 dt. 12-10-2004)

In this case, one division of the company was transferred to another company under a scheme of arrangement. Commissioner of Sales Tax, Maharashtra State, noted that the Division is transferred in its entirety and held that there is no sale of any goods as such. It is change of constitution and not ‘sale’.

The judgment in case of Coromandel Fertilisers Ltd. (112 STC 1)(A.P.) was relied upon.

Coromandel Fertilisers Ltd. (112 STC 1)(A.P.)

In this case, the whole business was transferred to the other company. Sales tax authority considered the same as sale of ‘good’ i.e., the transfer of busi-ness was considered as sale of goods liable to tax. Honourable A.P. High Court rejected the contention, holding that it is not covered under Sales Tax Laws. The goods consisted in business were also held as not liable to tax, as business itself ended and transaction cannot be said to be in the course of business.

Kwality Biscuits (P) Ltd. vs. State of Karnataka (53 VST 66)(Karn)

Recently Honourable Karnataka High Court had an occasion to consider this situation.

In this case, the facts were as under:

“The petitioner- dealer was engaged in manufacture and sale of biscuits and confectionery, wheat products, jams, jellies and creams. Its promoters entered into an agreement with Britannia, under which the promoters of the dealer-company agreed to exit the business of biscuits by effecting a sale of the entire business as a whole and as a going concern. The entire assets as well as liabilities including the movables and immovables, goodwill, intellectual property assets such as registered trademarks and brand names as well as unregistered trademarks and brand names stood transferred by virtue of sale/transfer of equity shares held by the promoters along with their family members in the dealer-company in favour of Britannia. The question was whether the sale of intellectual property owned by the dealer-company attracted payment of sales tax under the Karnataka Sales Tax Act, 1957:

Honourable Court referred to various judgments, throwing light on various aspects involved like, meaning of ‘business’, ‘goods’ and others.

In respect of ‘business’, amongst others, reference made to judgment of Honourable A. P. High Court in Coromandel Fertilisers Ltd. (112 STC 1)(A.P.) as under:

“22. In order to highlight the issue which we propose to address ourselves in extenso, it is necessary to note that the Act ordains that transfer of property in goods for valuable consideration must be ‘in the course of trade or business’ (vide section 2(1)(n)). This is so, because the incidence of tax falls on a dealer who ‘carries on the business of buying, selling, supplying or distributing goods’ (vide section 2(1) (e)). A sale by a person who carries on the business of buying, selling, etc., and a sale in the course of business are the twin indispensable requirements to attract the charge of tax under the APGST Act. The crucial question then is, whether these requirements are satisfied. Is there an element of business present in these disputed transactions? Assuming there was a sale of goods, did such sale take place ‘in the course of business’ and by a person who carries on the business of buying and selling goods?”

They have also referred to the meaning of the word “business” as explained in the aforesaid Raipur case [1967] 19 STC 1 (SC), as under (pages 14 and 29 in 112 STC):

“24. The expression ‘business’, though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business, there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive, and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit-motive. By the use of the expression ‘profit-motive’, it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity. In actual practice, the profit motive may be easily discernible in some transactions; in others, it would have to be inferred from a review of the circumstances attendant upon the transaction.

70. We are therefore of the view that transfer of goods involved in the process of disposing of the entire cement manufacturing unit hitherto owned by the petitioner-company does not tantamount to ‘business’ within the meaning of section 2(1)(bbb) of the Act and the sale is not ‘in the course of business’. The charge to tax is therefore not attracted under the APGST Act.”

In the light of above, Honourable High Court made observations as under:

“Therefore, to attract the liability to pay tax u/s. 5 of the Act, a dealer must be carrying on the business of buying, selling, supplying and distributing goods. A person to be a dealer must be engaged in the business of buying or selling or supplying goods. A person is a dealer within the meaning of the Act, when he carries on the business of buying or selling of goods for consideration paid or payable in future. What is required is that, sale or purchase must take place during the course of business of buying or selling in view of definition of “dealer” in clause (h) of section 2 of the Act. The expression “business”, though extensively used in taxing statutes, is a word of indefinite import. In taxing statutes, it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit. To regard an activity as business, there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive and not for sport or pleasure. Whether a person carries on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions must ordinarily be entered into with a profit-motive. “During the course of business” postulates a continuous exercise of an activity. It also connotes some real, substantial and systematic or organised course of activity or conduct set with a purpose. In taxing statutes, it is used in the sense of a whole time occupation or profession of a person which requires continuous attention and labour. The expression “carrying on business” requires something more than mere selling or buying. It is not merely the act of selling or buying that makes a person a dealer, but the object of the person who carries on the activity is important to attract levy of sales tax. “Sale” means every transfer of the property in goods by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration. A sale by a person who carries on the business of buying, selling, etc., and a sale in the course of business are the twin indispensable requirements to attract the charge of tax. The taxing statutes must be construed with strictness and no payment is to be exacted from the subject, which is not clearly and unequivocally required by the statute.”

On the facts of the case, Honourable High Court held that the intellectual properties are required till business is running and there is no possibility of selling them. In other words, the High Court held that the sale is not in the course of business or incidental to carrying on business and no tax can be attracted on the same.

Conclusion

The judgment throws light on aspect of ‘course of business’ vis-à-vis such inevitable items where transfer can take place alongwith transfer of running business only and there cannot be independent sale, so as to become taxable as separate sale. It will be useful for dealers in taxation of similar transactions.

Nirav Shah

Establishing Taxable Event — Burden on Whom?

Introduction:

Under fiscal laws, and more particularly under Sales Tax Laws, many a time an issue arises as to whether any taxable transaction has taken place or not? The tax under Sales Tax Laws can be levied only if there is a transaction of sale or purchase, as the case may be. It is possible that on the facts of the case the dealer may be contending that his transaction is not sale/purchase transaction and hence no tax should be levied on the same. Under the above circumstances, dispute arises as to on whom the burden lies to prove the taxable event. There are a number of judgments throwing light on the said issue. Reference can be made to the following important judgments.

Judgments:

(a) Haleema Zubair Tropical Traders v. State of Kerala, (19 VST 142) (SC)

The gist of the judgment is as under:

The assessee was the proprietor of two concerns: Tropical Traders and Poseidon Food Co. Tropical Traders was a dealer in tiles, and, the business of Poseidon Food Co. was to render services to various exporters in respect of inspection and certification of quality of the items sought to be exported.

The assessee declared taxable turnover of Rs.28,20,474, being sale of goods, for the purpose of sales tax under the Kerala General Sales Tax Act, 1963. However, receipt shown as commission amounting to Rs.45,80,168 from the business of Poseidon Food Co. was also sought to be assessed by the Department on the ground that it was not supported and proved by any documentary evidence. Before the Appellate Authority the assessee produced the income-tax returns and the assessment orders as well as copy of orders placed by exporters and the certificate granted by the Marine Products Export Development Authority. The first Appellate Authority held that the profes-sional services rendered by the assessee to the exporters involving skill and knowledge did not constitute any transfer of property and that the levy of sales tax on the sum of Rs.45,80,168 was not in order. The Sales Tax Appellate Tribunal, however, reversed the decision of the first Appellate Authority on the ground that the onus was on the assessee to prove that the receipts were not the result of sale. The High Court dismissed the revision petition of the assessee as well as a review application.

On appeal, the Supreme Court, setting aside the decision of the High Court and remitting the matter to the Assessing Authority, held that the Assessing Authority ought to consider the matter afresh on the basis of the materials placed by the assessee, viz., income-tax returns, assessment orders, certificate issued by the MPDEA, etc.

This shows that the authorities are under obligation to consider the material placed before it and prove the taxable event. They cannot put such burden upon an assessee.

(b) Girdharilal Nannelal (39 STC 30) (SC)

The facts of the case can be noted as under:

The Sales Tax Assessing Authority treated a cash-credit entry of Rs.10,000 (which was declared as undisclosed income for income-tax purpose) in the account books of the appellant-firm in the name of the wife of one of its partners as income of the appellant out of concealed sales and added Rs.1,00,000 to the turnover of the appellant on the basis that the sum of Rs.10,000 represented 10% of the profit. The explanation offered by the appellant that the sum of Rs.10,000 was given by the partner of the firm to his wife to obtain her consent for his second marriage and that the amount was lying with her and had been deposited by her with the appellant was not accepted by the sales tax authorities. The High Court also was not satisfied with the explanation and inferred that the amount reflected profits of the appellant’s business and those profits arose out of sales not shown in the account books.

On further appeal, the Supreme Court held that in order to impose liability upon the appellant for payment of sales tax by treating the amount of Rs.10,000 as profits arising out of undisclosed sales of the appellant, two things had to be established: (i) The amount was the income of the appellant and not of the partner or his wife. (ii) The amount represented profits from income realised as a result of transactions liable to sales tax and not from other sources. The onus to prove the above two ingredients was upon the Department. The fact that the appellant or its partner and his wife failed to adduce satisfactory or reasonable explanation with regard to the source of that amount would not in the absence of some further material had the effect of discharging that onus and proving both the ingredients. In such a case no presumption arose that the amount represented the income of the appellant and not of the partner or his wife. It was necessary to produce more material in order to connect that amount with the income of the appellant as a result of sales. In the absence of such material, mere absence of explanation regarding the source of the amount would not justify the conclusion that the amount represented profits of the appellant derived from undisclosed sales.

The above judgment also further reiterates the principle that the burden lies on the Sales Tax Department, if it wants to levy sales tax.

The assessee did not maintain manufacturing account and contended that no sale was effected inside the State during the assessment year and the Assessing Officer estimated the sale on the ground that the assessee, in past, had effected sale inside the State. In revision the Allahabad High Court held that though the initial onus to establish that no sale was made by the assessee is on the assessee, no evidence could be adduced for establishing a negative fact. When the assessee denies the factum of sale, the onus shifts to the

Revenue to disprove the contention of the assessee.

This judgment also clearly lays down that negative burden cannot be cast on the assessee. It is the Department who has to bring evidence for justifying levy of tax.

(d) M. Appukutty v. STO, (17 STC 380) (Ker.)

The Kerala High Court observed that principles of natural justice demand that there should be a fair determination of a question by quasi -judicial authorities. Arbitrariness will certainly not ensure fairness. If giving a mere opportunity to show cause, and to explain, would satisfy the principles of natural justice, the notice to show cause be-comes an empty formality signifying nothing, for, after issuing the notice to show cause, the authority can decide according to his whim and fancy. The judicial process does not end by making known to a person the proposal against him and giving him a chance to explain. It extends further to a judicial consideration of his representations and the materials and a fair determination of the question involved.

If the quasi-judicial authority dis-regards the materials available or if it refuses to apply its mind to the question and if it reaches a conclusion which bears no relation to the facts before it, to allow those decisions to stand would be violative of the principles of natural justice. Arbitrary decisions can also, therefore, result in violation of the principles of natural justice which is a fundamental concept of Indian jurisprudence. If a decision is allowed to be made as it likes, it may amount to even a mala fide decision.

In particular the High Court observed as under:

“The rejection of the account books does not give the Taxing Authority a right to make any assessment in any way it likes without any reference to the materials before him. The process of best judgment assessment, whether it be one relating to income-tax, agricultural income-tax or sales tax, is a quasi-judicial process, an honest and bona fide attempt in a judicial manner to determine the tax liability of a person. And such determination must be related to the materials before the authority.”

Therefore, even in the best judgment assessment, the authorities are under obligation to refer to the material on record and to arrive at just and proper conclusion. In one way this judgment also casts burden on the authorities to establish taxable event before levy of tax.

Conclusion:

From the above precedents, it can very well be said that for levying tax, it is the duty of the taxing authority to prove the taxable event. Even in cases where dealer fails to prove his case, it will not automatically entitle the authorities to levy tax. In such cases also they will be required to bring sufficient supporting evidence about taxable event before levy of tax.

Nirav Shah

Inter-State sales vis-a-vis Branch Transfer

A debatable issue arises about nature of transaction of dispatch of goods from one branch to another branch in other state. If the dispatch amounts to Branch transfer, the sale by branch to customer will be local sale.

On the other hand if the dispatch is not considered as branch transfer it will amount to inter-State sale from the moving state. To decide the nature of movement, whether inter-State sale or branch transfer, reference is required to be made to CST Act, 1956.

Under CST Act the nature of inter-State sale transaction is defined. Therefore, if the transaction falls into said definition, it will be inter-State and if not covered by the said definition, it will be a local sale. The definition of the inter-State sale is given in S. 3 of the CST Act, 1956. The said section is reproduced below for ready reference:

“A sale or purchase of goods shall be deemed to take place in the course of interstate trade or commerce if the sale or purchase –

a) occasions the movement of goods from one State to another; or

b) is effected by a transfer of documents of title to the goods during their movement from one State to another.”

It can be seen that if there is movement of goods from one state to another state because of sale, such sale will be inter-State sale. There is no condition that the clause for movement from one state to another state should be expressly provided in the sale agreement. In other words, even if the implied link between the movement and sale is established, it will be inter-State sale.

On the other hand, if the movement of goods from one state to another state is without reference to any pre-existing sale, it will not be an inter-State sale.

The cases of inter-State sales vis-a-vis branch transfers are required to be seen in light of above legal position. The branch and the head office or other branch in other State, are one and the same entity. Therefore, when a branch in one State transfers goods to branch in other State, there can be two situations: First, the branch in one State may be
transferring goods to branch in other State without reference to any particular sale agreement etc. in the transferee State. In other situation, the branch in transferee State may have pre-committed sale agreement and the branch in transferring State may be sending the goods to the branch in pursuance of said agreement. The receiving branch may thereafter deliver the goods to the customer. In this case also, though the delivery is to a branch, the transaction will be considered as an inter-State sale. In short, if there is nexus between dispatch from one State and sale in other State, such sale will be in the category of inter-State sale.

There are number of judicial pronouncements deciding nature of transactions. Reference can be made to following few important judgments:

Nivea Time (108 STC 6) (Born.)

The observations of the Bombay High Court on nature of interstate sale are as under:

“8. S. 3 of the Central Sales Tax Act, 1956 lays down when a sale or purchase of goods is said to take place in the course of interstate trade or commerce. It says:

‘A sale or purchase of goods shall be deemed to take place in the course of interstate trade or commerce if the sale or purchase –

c) occasions the movement of goods from one State to another; or

d) is effected by a transfer of documents of title to the goods during their movement from one State to another.’

In this case, we are concerned with sale or purchase falling under clause (a).

9. It is well-settled by now by a catena of decisions of the Supreme Court that a sale can be said to have taken place in the course of inter-State trade under clause (a) of S. 3, if it can be shown that the sale has occasioned the movement of goods from one State to another. A sale in the course of inter-State trade has three essentials: (i) there must be a sale; (ii) the goods must actually be moved from one State to another; and (iii) the sale and movement of the goods must be part the same transaction. The words ‘occasions’ is used as a verb and means to cause to be the immediate cause of. There must exist a direct nexus between the sale and the movement of the goods from one State to another. In other words, the movement should be an incident of and necessitated by the contract of sale and be inter-linked with the sale of goods. [See Kelvinator of India Ltd. v. State of Haryana, (1973) 32 STC 629 (SC)]. It is not necessary for a sale to be an interstate sale that the covenant regarding inter-State movement must be specified in the contract itself. It would be enough if the movement was ‘in pursuance of’ or ‘incidental to’ the contract of sale. Similarly, if the movement of goods is the result of contract and is an incident to the agreement between the parties, the transaction will remain an inter-State one no matter in which State the delivery of goods is taken by the purchaser. In other words, the question whether it is an inter-State sale or intra state sale, does not depend upon the circumstances as to in which state the property in the goods passes. It may pass in either State and yet the sale can be an inter-State sale. What is decisive is whether the sale is one which occasions the movement of goods from one State to another.”

English Electric Company of India Ltd. v. Deputy Commercial Tax Officer, (1976) (38 STC 475) (SC)

In this case, it was observed by Supreme Court as under:

“When the movement of goods from one State to another is an incident of the contract it is a sale in the course of inter-State sale. It does not matter in which State the property in the goods passes. What is decisive is whether the sale is one which occasions the movement of goods from one State to another. The interstate movement must be the result of a covenant, express or implied, in the contract of sale or an incident of the contract. It is not necessary that the sale must precede the interstate movement in order that the sale may be deemed to have occasioned such movement. It is also not necessary for a sale to be deemed to have taken place in the course of inter-State trade or commerce, that the covenant regarding inter-State movement must be specified in the contract itself. It will be enough if the movement is in pursuance of and incidental to the contract of sale.”

It was further observed:

…… If there is a conceivable link between the movement of the goods and the buyer’s contract, and if in the course of inter-State movement the goods move only to reach the buyer in satisfaction of his contract of purchase and such a nexus is otherwise inexplicable, then the sale or purchase of the specific or ascertained goods ought to be deemed to have taken place in the course of inter-State trade or commerce as such a sale or purchase occasioned the movement of the goods from one State to another . . . .

Cheeseborough Pond’s Inc. v. State of Tamil Nadu (52 STC 164)

The short gist of the judgment is as under:

The assessee was a manufacturer and dealer in face powder, having its head office and manufacturing unit at Madras and branches at Bombay and other places. A department of the Government of India, known as Canteen Stores Department which was part of the Defence Ministry, placed orders for the purchase of the goods manufactured by the assessee with the Bombay branch of the assessee. The orders, when received by the Bombay branch, were forwarded by that branch to the head office at Madras. The head office then consigned the goods by lorry to the Bombay branch warehouse, mentioning in the lorry way-bill that the goods had been dispatched against orders passed by the Canteen Stores Department. When the goods reached Bombay, these were cleared by the Bombay branch and immediately supplied to the Canteen Stores Department, after raising invoices in terms of the orders already placed. The assessing authorities as well as the Tribunal rejected the assessee’s contention that the transactions could not be regarded as sales in the course of inter-State trade, chargeable to tax u/s.3(a) of the Central Sales Tax Act, 1956. On revision, the assessee contended that the goods moved from Madras to Bombay in what was described as stock transfers and that the Canteen Stores Department placed the orders not with the head office at Madras direct, but only with the Bombay branch:

Madras High Court held,

i) that if all that the stock transfers evidenced was displacement of goods from a head office to a branch, then there would be no difficulty at all in accepting the contention that there was no inter-State sale for the simple reason that the transfers from Madras to Bombay involved no sale at all; but as found by the Tribunal, the stock transfer notes relied on by the assessee themselves clearly referred to the particular orders placed by the Canteen Stores Department with the Bombay branch of the assessee against which the goods were sent in the particular consignment or consignments, by lorry. It was, therefore, not accurate to describe the movements of the goods as inter-office, or non-sale, consignments from the head office to a branch;

ii) that the fact that the head office at Madras did not dispatch the goods direct to the Canteen Sores Department which placed the orders, but sent the goods to the Bombay branch from where the goods ultimately found their way to the purchaser did not make any difference to the application of S. 3(a) of the Act. It did not matter how many stop-overs were there in the delivery State before the goods reached the purchaser’s hands. All that mattered was that the movement of the goods was in pursuance of the contract of sale or as a necessary incident to the sale itself; and

iii) that, therefore, the transaction between the assessee and the Canteen Stores Department, Bombay, was an inter-State sale liable to tax.

M/s. Tan India Ltd. v. State of Tamil Nadu, (133 STC 311) (Mad.)

The brief gist of the judgment is as under:

Identifiable ultimate buyers in Kerala State placed specific orders at the dealer’s branch office at Palghat in Kerala. The branch office at

Pal ghat informed the head office at Kumarapalayam in Tamil Nadu about the specific requirements of the ultimate customers in Kerala. It is only on the information so furnished by the branch office, the head office either effected dispatches directly to the ultimate buyers in some transactions or to its branch office in other transactions and thereafter effected delivery to those ultimate buyers. The assessing officer treated the transactions as inter-State sales and also imposed penalty at 150% of the tax due upon the dealer. The Appellate Assistant Commissioner confirmed the same. The Tamil Nadu Sales Tax Appellate Tribunal found some transactions as inter-State sales and other transactions as stock transfer to dealer’s branch. It reduced the penalty to fifty per cent of the tax due. On revision petition both by the dealer and the Revenue:

Madras High Court held, (i) that whether the dispatches were effected from the head office to the ultimate buyers directly at Kerala or whether the deliveries were effected to the ultimate buyers outside the State through the branch make no difference in the eyes of law. The goods moved from the State of Tamil Nadu to the State of Kerala, pursuant to or incident of a contract of sale entered into by the dealer with the identifiable ultimate buyers. Further from the orders placed at the branch located at a different State and the order subsequently having been communicated to the head office in the State of Tamil Nadu, no legal consequence was likely to flow for the simple reason that the head office and the branch office were offices of the same company and they did not possess separate juridical personalities. The movement of goods from the head office was occasioned by the order placed by the customers and was an incident of the contract and therefore from the very beginning from Kumarapalayam in the State of Tamil Nadu, all the way until delivery to customers in Kerala State, it was an inter-State movement. Therefore, the transactions were inter-State sales u/ s.3(a) of the Central Sales Tax Act, 1956. [Sahney Steel and Press Works Ltd. v. Commercial Tax Officer, (1985) 60 STC 301 (SC) followed.]

Thus, the legal position is very clear. If the move-ment from transferring branch is without reference to any pre-existing sale, it will be a case of branch transfer. The sale by transferee branch to customer will be a local sale. On the other hand, if the en-marked (ascertained) goods are sent to branch for a particular customer, it will be an inter-State sale from the transferring branch, whether delivery is given through the transferee branch or directly given by the transferor branch. On the other hand, movement without reference to pre existing sale agree-ment, will amount to branch transfer.

Nirav Shah

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