Sujit Ghosh Advocate, Delhi High Court Partner & National Head Tax Litigation & Controversies One Transaction – Many Taxes: The continuing tussle between

Sujit Ghosh Advocate, Delhi High Court

Partner & National HeadTax Litigation & Controversies

One Transaction – Many Taxes:

The continuing tussle between the States and the Centre to levy taxes on certain transactions

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Agenda

Aspect Theory Transactions-Levy of tax by Centre and State

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A Renting of Immovable property

B Hiring, leasing and licensing of goods

C Software development/ licensing of software

D Works contract

E Catering contracts

F Broadcasting services by DTH Operators

List of Taxes- Centre and State Levy

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Article 246- Distribution of legislative power between the Centre and State.List I- Parliament has the exclusive power, List II- State has the exclusive power

List III- Areas on which both state and Parliament can make laws

Payments of service tax and VAT are mutually exclusive. They should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a

composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. :

Imagic Creative Pvt. Ltd. v. Comm. Of Commercial Taxes, 2008 (9) S.T.R. 337 (S.C)

Wherever legislative powers are distributed between the Union and the States, situations may arise where the two legislative fields might apparently overlap. It is the duty of the Courts, however difficult it may be, to ascertain to what degree and to what extent, the authority to deal with matters falling within these classes of subjects exists in each Legislature and to define, in the particular case before them, the limits of the respective powers. It could not have been the intention that a conflict should exist; and, in order to prevent such a result the two provisions

must be read together, and the language of one interpreted, and, where necessary modified by that of the other

Federation of Hotels and Restaurants Association of India v. UOI , 1989 (3) SCC 634

Aspect theory

Aspect theory:

Subjects which in one aspect and for one purpose fall within the power of a particular legislature may in another aspect and for another purpose fall within another legislative power. The law 'with respect to' a subject might incidentally 'affect' another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects- But the fact that there is an overlapping does not detract from the distinctiveness of the aspects

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Renting of Immovable Property

Immovable Property

Renting of Immovable Property- leviable to service tax under the Finance Act ( List I)

Leasing of Immovable Property- leviable to stamp

duty ( List II)

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Home Solutions Retail India Pvt. Ltd. v. UOI

158 (2009) DLT 722 (DB)

• Notification and circular taxed immovable property and not services ‘in relation to’

• Tax on land and building under Entry 49 List II

• Renting does not entail any value addition, hence it will not be considered as a value added tax

• It is merely a property transaction. There is no value addition and thus cannot be regarded as a value added tax.

• Notification and circular ultra vires• The Court did not go into the argument of ‘tax on

land and building’

• Renting of immovable property is a tax on land and building under Entry 49 List II

• No value addition in the services rendered

• Tax on ‘land and building’ requires a definite relationship with the land. It is a tax on the general ownership of the land. Renting is not a tax on land.

• The assumption by a legislative body that an element of service is involved is not irrational and absurd

• As long as the Parliament does not entrench upon a field reserved for the state legislature, the law is valid and within the legislative competence of the Parliament

Home Solutions Retail India Pvt. Ltd. v. UOI2011 (24) S.T.R. 129 (Del.)

• Renting of immovable property is a tax on land and building under Entry 49 List II

• No value addition in the services rendered, property transaction

• Aspect theory is not applicable as Entry 49 of List II would be redundant

• Deeming fiction cannot be employed for taxing an entry reserved for the state legislature

• Renting of immovable property is for subserving the cause of facilitating commerce, business or promoting the same.

• The potentiality to be let out on rent for a purpose denotes an element of service is involved which amounts to value addition

• Once there is value addition and element of service is involved, service tax gets attracted and is outside the purview of Entry 49 List II

Retailers Association of India v. UOI

(2011) 44 VST387 (Bom)

ISSUE HELD

Litigation-Renting- Tax on Land and Building?

For use in the course or furtherance of business or commerce

These words do not form a part of the present definition under declared services. Would renting of immovable property still be considered as a value added service????

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Statutory Provisions

Article 366(29A)- Tax on sale and purchase includes:

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

Section 66E (c) of the Finance Act- Declared Service

Temporary transfer or permitting the use or enjoyment of any intellectual property right

Section 66E (d) of the Finance Act- Declared Service

Hiring, leasing licensing of goods without transfer of right to use

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Transfer of IPR- Declared Service’ under service tax). Levy of VAT on such intangibles has also been subject matter of litigation

Litigations-Transfer of right to use IPR

AGS Entertainment v. UOI2013[32] STR 129 (Mad.)IssueWhether the temporary transfer of copyright or its use or enjoyment amounts to transfer of right to use the goodsHeldService tax is not leviable on the transfer of right to use, only on the temporary transfer or permitting the use or enjoyment thereof. As the producer does not relinquish his right, transfer of right to use to the distributor is temporaryTransfer of the right to use and permission to use the goods operate in different fields Merely due to overlapping, legislation cannot be vitiated

Malabar Gold v. CTO, 2013 [32] S.T.R. 3 (Ker.) (Division bench decision)

Issue:Whether receipts on account of franchisee fee attract service tax or VAT?Held:The Court relied upon judgment in the matter of BSNL and held that twin elements i.e. effective control and possession were not satisfied. Thus, franchise agreement will not attract the provisions of the KVAT Act.

Tata Sons Ltd v. State of Maharashtra [2015

80 VST 173 Bom.]Issue:Whether sales tax is leviable on agreement allowing use of ‘TATA’ name and trade marks by TATA group companiesHeld:Court distinguished BSNL decision. Held that statute doesn’t envisage exclusive transfer and held sales tax payable on amount received for brand/trade mark usage

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• Goods available for delivery• Consensus about the identity of the goods• Legal right to use the goods

• Legal right to the exclusion of the transferor• Goods once transferred cannot be transferred to

any other person

• Transfer of right to use is determined on the basis of the facts of every case

• Delivery of possession must be distinguished from its custody. the transferee of goods may be in possession while transferor has the custody of the goods.

• Right to use arises only on the transfer of such a right.

• Under VAT/ Sales Tax. Delivery per se cannot determine exigibility to tax, actual transfer of right to use.is required.

• Effective control does not always mean physical control over the goods. If the manner, method, time or use is decided, amounts to effective control.

• During the period of the contract, exclusive right to use the goods along with the licenses vests with the lessee to constitute “transfer of right to use”

BSNL v. Union of India2006 (3) ALT 6 (SC)

20th Century Finance Corp. Ltd. v. State of Mah2000 (6) SCC 12.

GS Lamba v. State of AP 2012-TIOL-49-HC-AP-CT

Transfer of right to use

Rashtriya Ispat Nigam Ltd. v. Union of India1990 77 STC 182 (AP)

Right to Use v. Transfer of Right to Use

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Section 66E (d) of Finance Act- Declared Services

Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software;


Development/ Upgradation of software- If the software is transferred along with development/upgradation service- Leviable to works Contract

Development/ Licensing of

software- Licensing of software-

VAT/service tax depending on whether there is a transfer of right to use

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Case Issue DecisionSasken Communication Technologies Ltd. v. Joint Commissioner of Commercial Tax(2012) 55 VST 89 (Karn)

Whether the development of software is a works contract and accordingly leviable to VAT under Kanataka VAT Act

• The rights and title of the software sought to be developed by the Assessee always remains with the customer even before the software came into existence

• The consideration received is for the development services and not for transfer of property in goods

• As there is no transfer of title from the developer to the customer, there is no sale leviable to VAT.

Development of Software-Litigation

Present positionDepending on the terms of the agreement and the time of transfer of title, the transaction is leviable to

service tax or VAT

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Section 66E (h)- Finance Act

Service portion in the execution of a works contract

Article 366(29A)- Tax on sale or purchase of goods includes:

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

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Cases Decision

State of Madras v. Gannon Dunkerley

AIR 1958 SC 560

• Law prior to insertion of clause (29A) in article 366 of the Constitution, categories of transaction as ‘deemed sale’ laid down

• Works contract was essentially a contract of service and no sales tax could be levied on goods transferred in the course of execution of works contract

Gannon Dunkerley & Co v. State of Rajasthan

[1993] 88 STC 204

• Law governing the determination of taxable turnover under works contract was settled in this case

• Tax on works contract would remain a tax on sale of goods • Value of taxable turnover would not include the consideration

which was not towards the goods• Consideration towards the service portion would not be taxable

under VAT statutes BSNL v. UOI

[2006 (2) STR 161 (SC)]

• Except in cases of works contracts and catering contracts as covered under Article 366(29A), composite transactions cannot be split into contract of sale and contract of service

• The test whether a transaction is a ‘composite transaction’ is that did the parties intend that separate rights arise out of the constituent contract of sale and contract of service

• Dominant nature test does not apply to works contract

Controversies-Works Contract

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Cases Decision

Daelim Industrial Co Ltd v. CCE

[2007] 7 STT 184 (New Delhi-CESTAT)

• Contract entered into was a works contract on turnkey basis and not a consultancy contract.

• Works contract cannot be vivisected. No liability of service tax on works contract

CCE v. BSBK Pvt Ltd

[2010] 26 STT 263 (New Delhi –CESTAT) (LB)

• Turnkey contract can be vivisected• Service elements involved in the contract can be segregated and

be valued for levy of service tax under Finance Act• Article 366(29A)(b) of the Constitution of India provides for

‘deemed sale of goods’ which envisages and allows vivisection of indivisible contracts

Controversies-Works Contract

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Decision-The contract for sale and installation of a lift was a works contract and not a contract for sale of goodAll such transactions would be treated as works contracts, leviable to VAT and service tax

Kone elevators India Pvt. ltd v. State of TN

and Ors

L&T v. State of Karnataka

2013-VIL-03-SC-LB

Decision-Contracts for construction of flats undertaken by the Builder is for and on behalf of the flat purchaser is a works contract. Building is a species of works contract.Transfer of property in goods can be in the form of goods or any other form including immovable propertyThe dominant nature test has no application.Taxing the sale of goods is possible even after incorporation of goods, provided the tax is directed to the value of goods and not immovable property

Recent cases-Implications on service tax

Comm. Of Excise and ST v. L&T Limited

Civil Appeal 6770 of 2004 (SC)

Decision-Prior to 2007, i.e. introduction of works contract service, there was no charge or machinery provision under the Finance Act for taxing indivisible works contracts. Indivisible works contract not leviable to service tax prior to introduction of works contract service category

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Section 66E (i)- Finance Act

Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity

Article 366(29A)- Tax on sale or purchase of goods includes:

(f) tax on 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 for cash, deferred payment or other valuable consideration, 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;

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ISSUE- Whether the supply of meals in a hotel along with other amenities qualifies as a sale and is leviable to sales tax

HELD- The transaction is one and indivisible i.e. for the services of lodging provided by the Hotel.

There is no intention between parties to sell and purchase food stuff. The sale is only incidental to service

No sales tax is leviable on the food supplied in the hotel

ISSUE- Whether the supply of meals in a hotel qualify as a sale and whether the supply of meals in a restaurant to casual visitors qualifies as a saleHELD- Restaurants also provides services in addition to food, in the nature of furniture, furnishing, linen, crockery etc.

Following the judgment of State of Punjab v. Assoc. Hotels of India Ltd., the services of meals to visitors in a restaurant and meals in a hotel do not qualify as sales

ISSUE-Whether service tax and VAT, both, would be leviable in respect of the catering services provided on board the train

HELD The transaction between IRCTC and India Railways is not a composite transaction as no services are involved.It is pure contract for sale and services, of heating etc., are only incidental to the sale.

Service tax is not leviable on this transaction.

ISSUE-Constitutional validity of section 65(105)(zzzzv) and (zzzzw) was challenged.Whether the supply of food and beverages taxable under Entry 54 List II covers services HELD On the basis of Article 366(29A) of the Constitution, service forms a part of sale of goods and State Legislature has the power to impose tax on the service element forming a part of the sale of goods.

Writ petition allowed- Service tax on services provided by a restaurant-beyond the legislative competance of the Parliament

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State of Punjab v. Associated Hotels of India Ltd(1972) 2 SCR 937

Nothern India Caterers (India) Ltd v. Lt. Gov of Delhi1978 AIR 1591

IRCTC v. Govt of NCT & Delhi2010-TIOL-517-HC-Del-ST

Kerala Classified Hotels & Resorts Assoc v. UOI2013-TIOL -533-HC-Ker.-ST

Controversies

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ISSUE- Whether VAT would be chargeable on the entire value of food and beverages supplied, in the case where 40% of the amount has already suffered service tax

HELD-VAT can only be imposed on the sale of food and beverages.Since, the value of services has been declared at 40% of the total value, VAT cannot be levied on the same.

ISSUE- Whether service tax can be charged on any item of sale and vice veraWhether section 66E(i) is violative of Article 366(29A)(f) of the Constitution

HELDTax on sale and purchase of food can only be imposed by the states. Similarly, tax on services can only be levied by the Parliament. Hence, no service tax can be charged on any item of food.Article 366(29A)(f) of the Constitution does not provide that services are subsumed in sales. It separates sale of food and drinks from services.

VAT should not be charged on the entire amount of the bill as 40% or 60 % is already leviable to service tax.

State should frame rules or issue clarifications in order to avoid double taxation.

Valley Hotels and Resorts Ltd. v. CCT, DehradunCommercial Tax Revision 02/2014 dated April 10, 2014

Hotel East park and Anr. v. Union of India and OrsW/P. No. 95/2013 dated May 6, 2014

Controversies-Post Declared Services

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Direct to Home (‘DTH’) Operators- Broadcasting services- leviable to service tax and entertainment tax

Entertainment Tax v. Service Tax

Bharti Telemedia Limited v. State of Jharkhand 2014(1)J.L.J.R.635

ISSUEWhether entertainment tax is the levy on

'broadcasting service' on which service tax is leviable or falls under Entry 62 of List II

HELDThere are two different aspects/spheres of DTH- broadcasting service for which service tax is levied and entertainment for which entertainment tax is levied. The transaction of providing broadcasting services and entertainment cannot be treated as an indivisible contract so as to show that the predominant transaction is broadcasting and not entertainment

Tata Sky Limited v. State of Punjab[2011] 37 VST 1

IssueWhether levy of entertainment tax is covered is covered under Entry 62 of List II

HELDThe expression ‘entertainment’ is used in a wide sense to cover entertainment of any kind. Levy of entertainment tax is on the entertainment aspect which is independent from the levy of service tax on the service aspect.

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Sujit Ghosh Advocate, Delhi High Court Partner & National Head Tax Litigation & Controversies One Transaction – Many Taxes: The continuing tussle between