Supply of Tangible Goods for Use – Should one pay
Service Tax or VAT?!!
-CA Vineet Surana
FCA,MBA(F),DISA(ICAI)
------------------------------------------------------------------------------------------------------A persistent argument in indirect taxes is that of double taxation of a single
transaction. The dispute between state and central taxes arises because a
particular transaction is both deemed to be a supply of goods, in terms of the
State sales tax/value added tax definitions, as also a provision of services,
under the service tax law.
However, the Supreme Court, in its decision in Bharat Sanchar Nigam Ltd Vs
UOI [(2006) 145 STC 91], had held that double taxation was impermissible
and that transactions could only be charged to one of the two taxes and not to
both.
Finance Act 2008 has introduced, a new category of service which would be
subjected to levy of service tax and it is categorized under supply of tangible
goods for use. This category has been introduced with effect from 16.05.08 and
is another instance where a transaction of supply of goods is sought to be
subjected to service tax levy. The intention here seems to be to tax such
supply of goods where no VAT/sales tax is levied/ leviable. This has been
clarified by the departmental letter F.No. 334/1/2008 TRU dated 29.02.08
which goes to the extent of saying that transaction of allowing another person
to use the goods without giving legal right of possession and effective control
which is not treated as a deemed sale of goods is treated as a service, thereby
deeming such transaction as one amounting to service. One would have to
analyze each case ( agreements, invoices, conduct of parties etc.) to find out
whether there is transfer of possession and effective control as it would
determine whether the transaction is to be taxed as one of sale, or one of
service.
Definition
As per Section 65(105)(zzzzj) of Finance Act,1994 as amended, defines taxable
service means any service provided or to be provided to any person, by any
other person in relation to supply of tangible goods including machinery,
equipment and appliances for use, without transferring right of possession
and effective control of such machinery, equipment and appliances. The
section reads as follows:
Taxable
Service
means
services
provided
or
to
be
provided:
“to any person, by any other person in relation to supply of tangible goods including
machinery, equipment and appliances for use, without transferring right of possession
and effective control of such machinery, equipment and appliances;”;
Thus if one purely goes by the definition, it may also be possible to argue that
what is liable is service in relation to supply of tangible goods without
transferring right of possession and effective control of such machinery and
not the supply itself, though the intention of revenue as evidenced by the
departmental letter, is different.
The term “tangible” would have to be seen in light of the meaning assigned
by English Dictionary. As per Random House Webster’s Unabridged
Dictionary, tangible means capable of being touched or discernible by the
touch and is the attribute of being detectable with the senses. The goods being
supplied should be tangible goods i.e. having physical existence and form in
order to attract liability under this category. In other words intangibles would
not be covered under this category at all and the taxability of the same would
have to be seen under the old category of Intellectual Property Services since
this service category specifically deals with tangible goods.
The word supply need not necessarily indicate transfer of the right of
possession or effective control over the goods/materials in question. In order
to make a transaction of supply of tangible goods not liable under this
category, there should be a transfer of both possession as well as effective
control over the said goods, to the user. The presumption here seems to be
that VAT/sales tax is levied in cases where both right of possession as well as
effective control over the goods is transferred to the user. The risk and reward
of ownership would lie with the person who enjoys the possession.
From the above section there are 3 features which come to notice:
1. The service essentially has to be in relation to supply of tangible goods to
any person by any other person;
2. There must not be any transfer of right of possession of the goods from
the service provider to the service recipient;
3. There must not be any transfer of effective control of the goods from the
service provider to the service recipient.
Hence if the above 3 feature’s are fulfilled in a commercial transaction than
the same would be liable to service tax from 16.05.2008.
Illustration
A company is providing computers on rental basis to its clients for a period of
12 months for a consideration of Rs. 5000 per computer per month. Here the
company has supplied/provided computers on rent and computers are goods
but as can be noticed that the owner of computers has also parted with the
right of possession and effective control in favour of the user because the user
will be having unchecked – unhindered possession of the computers. So the
above transaction satisfies only 1 criteria out of the 3 mentioned above and
therefore the same would NOT be liable to service tax.
But imagine in the same transaction if the computers are supplied alongwith
manpower to help the user use them and has stipulated in the contract that no
one other than his personnel would use those computers – in other words the
owner company is providing computers as well as manpower to operate
under one single contract than in that case it can be safely said that all the
three features are fulfilled and the transaction shall become taxable from
16.05.2008
Other issues
Where services are provided and tangible goods are also supplied for use, the
nature of services provided would assume significance especially under
service tax where the services provided are taxable services. For instance, if
site formation services are provided along with supply of excavators, and
such supply is part and parcel of the contract for service, then the charges for
site formation related work would be taxed under the head site formation
services under service tax. The assessee would have to then analyze whether
the usage of excavator amounts to transfer of right to use goods to the
client/customer. Where it does not, the charges for the same would have to be
subjected to service tax. The classification of the service would be done using
the basic principles of classification under service tax.
The issue of whether a transaction where the right of possession and effective
control is not transferred is taxable under service tax law has been discussed
in relation to certain other definitions of taxable services as well, such as ‘rent
a cab’ operator services as well as ‘intellectual property services’. In relation to
rent a cab operator service, the key words are with regard to the ‘renting of a
cab’.
In a situation where cab services are procured without the control and
possession of the cab being transferred to the user, the question was whether
the definition would apply at all. As regards intellectual property services, the
issue is slightly more complicated as it extends not only to temporary
transfers but also to transactions whereby the use or enjoyment of an
intellectual property right is permitted.
Exemptions
The supply of goods carriage to a Goods Transport Agency for carriage of
goods by road liable under GTA service, without transferring the right as to
possession and effective control, has been exempted under notification
29/2008 ST dated 26.06.08. The usage of the vehicle should be by the said
GTA.
Conclusion
There have been several instances where the application of these other
definitions has been seriously disputed, in the absence of a ‘transfer’ of the
underlying goods. However, with the introduction of the definition of supply
of tangible goods services, it clearly is the position that in all such instances
the service tax will now apply. The VAT will not apply and thus only the one
indirect tax will be charged.