One Transaction – Many Taxes:
The continuing tussle between
the States and the Centre to levy
taxes on certain transactions
Sujit Ghosh
Advocate, Delhi High Court
Partner & National Head
Tax Litigation & Controversies
Agenda
1
3
Aspect Theory
Transactions-Levy of tax by Centre
and State
A
Renting of Immovable
property
B
Hiring, leasing and licensing of
goods
C
Software development/
licensing of software
D Works contract
2
E Catering contracts
List of Taxes- Centre
and State Levy
F
Broadcasting services by DTH
Operators
1
Aspect theory
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
Aspect theory:
Wherever legislative powers are distributed between the Union and the States, situations may
arise
whereinthe
two
legislative
fields
might
apparently
overlap.
It is the of
duty
of the Courts,
Subjects which
one
aspect
and for
one
purpose
fall within
the power
a particular
however
difficult
it may be,
to ascertain
what degree
and tofall
what
extent,
the authority
to deal
legislature
may
in another
aspect
and fortoanother
purpose
within
another
legislative
with matters falling within these classes of subjects exists in each Legislature and to define, in
power.theThe
law 'with
to' a
incidentally
another
subject
particular
case respect
before them,
thesubject
limits of might
the respective
powers.'affect'
It could not
have been
the
intention
conflict
exist;
and,thing
in order
prevent
a result
thelatter
two provisions
in some
way;that
buta that
is should
not the
same
astothe
law such
being
on the
subject.
must be
together, and
of onemust
interpreted,
and, where
necessary
There might
be read
overlapping;
butthe
thelanguage
overlapping
be in law.
The same
modified by that of the other
transaction may involve two or more taxable events in its different aspects- But the fact
Federation of Hotels and Restaurants Association of India v. UOI , 1989 (3) SCC 634
that there is an overlapping does not detract from the distinctiveness of the aspects
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)
2
Agenda
1
3
Aspect Theory
Transactions-Levy of tax by Centre
and State
A
Renting of Immovable
property
B
Hiring, leasing and licensing of
goods
C
Software development/
licensing of software
D Works contract
2
E Catering contracts
List of Taxes- Centre
and State Levy
F
Broadcasting services by DTH
Operators
3
Agenda
1
3
Aspect Theory
Transactions-Levy of tax by Centre
and State
A
Renting of Immovable
property
B
Hiring, leasing and licensing of
goods
C
Software development/
licensing of software
D Works contract
2
E Catering contracts
List of Taxes- Centre
and State Levy
F
Broadcasting services by DTH
Operators
4
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)
5
Litigation-Renting- Tax on Land and Building?
ISSUE
Home Solutions
Retail India Pvt. Ltd.
v. UOI
158 (2009) DLT 722 (DB)
Retailers Association
of India v. UOI
(2011) 44 VST387 (Bom)
Home Solutions
Retail India Pvt. Ltd.
v. UOI
2011 (24) S.T.R. 129 (Del.)
HELD
• Notification and circular taxed immovable • It is merely a property transaction. There is no
property and not services ‘in relation to’
value addition and thus cannot be regarded as a
• Tax on land and building under Entry 49
value added tax.
List II
• Notification and circular ultra vires
• Renting does not entail any value • The Court did not go into the argument of ‘tax on
addition, hence it will not be considered as
land and building’
For use in the course or furtherance
a value added tax
of business or •commerce
Tax on ‘land and building’ requires a definite
• Renting of immovable property is a tax on
relationship with the land. It is a tax on the general
land and building under Entry 49 List II
ownership of the land. Renting is not a tax on land.
• No value addition in theThese
serviceswords do not form a part of the
• The assumption by a legislative body that an element
rendered
present definition ofunder
servicedeclared
is involved is not irrational and absurd
•
As
long
as
the Parliament does not entrench upon
services. Would renting of immovable
a field reserved for the state legislature, the law is
property still be considered
as athe
value
valid and within
legislative competence of the
added service????
Parliament
• Renting of immovable property is a tax on • Renting of immovable property is for subserving
land and building under Entry 49 List II
the cause of facilitating commerce, business
• No value addition in the services
or promoting the same.
rendered, property transaction
• The potentiality to be let out on rent for a purpose
• Aspect theory is not applicable as Entry 49
denotes an element of service is involved which
of List II would be redundant
amounts to value addition
• Deeming fiction cannot be employed for
• Once there is value addition and element of
taxing an entry reserved for the state
service is involved, service tax gets attracted
legislature
and is outside the purview of Entry 49 List II
6
Agenda
1
3
Aspect Theory
Transactions-Levy of tax by Centre
and State
A
Renting of Immovable
property
B
Hiring, leasing and licensing of
goods
C
Software development/
licensing of software
D Works contract
2
E Catering contracts
List of Taxes- Centre
and State Levy
F
Broadcasting services by DTH
Operators
7
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
8
Litigations-Transfer of right to use IPR
Transfer of IPR- Declared Service’ under service tax). Levy of VAT on such
intangibles has also been subject matter of litigation
AGS Entertainment v. UOI
2013[32] STR 129 (Mad.)
Issue
Whether the temporary transfer of
copyright or its use or enjoyment
amounts to transfer of right to use the
goods
Held
Service 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 temporary
Transfer 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
companies
Held:
Court distinguished
BSNL decision. Held
that statute doesn’t
envisage exclusive
transfer and held sales
tax payable on amount
received for brand/trade
9
mark usage
Right to Use v. Transfer of Right to Use
BSNL v. Union of India
Rashtriya Ispat Nigam Ltd. v. Union of India
2006 (3) ALT 6 (SC)
• 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
20th Century Finance Corp. Ltd. v. State of Mah
2000 (6) SCC 12.
• 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.
1990 77 STC 182 (AP)
• 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.
Transfer
of right to
use
GS Lamba v. State of AP
2012-TIOL-49-HC-AP-CT
• 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”
10
Agenda
1
3
Aspect Theory
Transactions-Levy of tax by Centre
and State
A
Renting of Immovable
property
B
Hiring, leasing and licensing of
goods
C
Software development/
licensing of software
D Works contract
2
E Catering contracts
List of Taxes- Centre
and State Levy
F
Broadcasting services by DTH
Operators
11
Statutory Provisions
Development/ Upgradation of
softwareIf the software is transferred along
with development/upgradation
service- Leviable to works Contract
Section 66E (d) of Finance ActDeclared Services
Development, design, programming,
customization, adaptation, up
gradation, enhancement,
Development/
implementation of information
technology software;
Licensing of
software-
Licensing of softwareVAT/service tax depending on
whether there is a transfer of right
to use
12
Development of Software-Litigation
Case
Issue
Decision
Sasken 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.
Present position
Depending on the terms of the agreement and the time of transfer of title, the transaction is leviable to
service tax or VAT
13
Agenda
1
3
Aspect Theory
Transactions-Levy of tax by Centre
and State
A
Renting of Immovable
property
B
Hiring, leasing and licensing of
goods
C
Software development/
licensing of software
D Works contract
2
E Catering contracts
List of Taxes- Centre
and State Levy
F
Broadcasting services by DTH
Operators
14
Statutory Provisions
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
15
Controversies-Works Contract
Cases
State of Madras v.
Gannon Dunkerley
AIR 1958 SC 560
Gannon Dunkerley & Co v.
State of Rajasthan
[1993] 88 STC 204
BSNL v. UOI
[2006 (2) STR 161 (SC)]
Decision
• 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
• 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
• 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
16
Controversies-Works Contract
Cases
Daelim Industrial Co Ltd v.
CCE
[2007] 7 STT 184 (New
Delhi-CESTAT)
CCE v. BSBK Pvt Ltd
[2010] 26 STT 263 (New
Delhi –CESTAT) (LB)
Decision
• 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
• 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
17
Recent cases-Implications on service tax
L&T v. State of
Karnataka
2013-VIL-03SC-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 property
The 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
Kone elevators
India Pvt. ltd v.
State of TN
and Ors
Comm. Of
Excise and
ST v. L&T
Limited
Civil Appeal
6770 of 2004
(SC)
Decision-The contract for sale and installation of a lift was a works contract and
not a contract for sale of good
All such transactions would be treated as works contracts, leviable to VAT and
service tax
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
18
Agenda
1
3
Aspect Theory
Transactions-Levy of tax by Centre
and State
A
Renting of Immovable
property
B
Hiring, leasing and licensing of
goods
C
Software development/
licensing of software
D Works contract
2
E Catering contracts
List of Taxes- Centre
and State Levy
F
Broadcasting services by DTH
Operators
19
Statutory Provisions
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;
20
Controversies
State of Punjab v. Associated Hotels of India Ltd
Nothern India Caterers (India) Ltd v. Lt. Gov of Delhi
1978 AIR 1591
(1972) 2 SCR 937
ISSUE- Whether the supply of meals in a hotel along with
other amenities qualifies as a sale and is leviable to sales
tax
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 sale
HELD- The transaction is one and indivisible i.e. for the
services of lodging provided by the Hotel.
HELD- Restaurants also provides services in addition to
food, in the nature of furniture, furnishing, linen, crockery etc.
There is no intention between parties to sell and
purchase food stuff. The sale is only incidental to service
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
No sales tax is leviable on the food supplied in the hotel
IRCTC v. Govt of NCT & Delhi
Kerala Classified Hotels & Resorts Assoc v. UOI
2010-TIOL-517-HC-Del-ST
2013-TIOL -533-HC-Ker.-ST
ISSUE-Whether service tax and VAT, both, would be
leviable in respect of the catering services provided on
board the train
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 The transaction between IRCTC and India
Railways is not a composite transaction as no services
are involved.
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.
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.
Writ petition allowed- Service tax on services provided by a
restaurant-beyond the legislative competance of the
Parliament
21
.
Controversies-Post Declared Services
Valley Hotels and Resorts Ltd. v. CCT, Dehradun
Hotel East park and Anr. v. Union of India and Ors
Commercial Tax Revision 02/2014 dated April 10, 2014
ISSUEWhether 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
W/P. No. 95/2013 dated May 6, 2014
ISSUE- Whether service tax can be charged on any item of
sale and vice vera
Whether section 66E(i) is violative of Article 366(29A)(f) of
the Constitution
HELD-
HELD
VAT can only be imposed on the sale of food and
beverages.
Tax 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.
Since, the value of services has been declared at 40%
of the total value, VAT cannot be levied on the same.
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.
22
Agenda
1
3
Aspect Theory
Transactions-Levy of tax by Centre
and State
A
Renting of Immovable
property
B
Hiring, leasing and licensing of
goods
C
Software development/
licensing of software
D Works contract
2
E Catering contracts
List of Taxes- Centre
and State Levy
F
Broadcasting services by DTH
Operators
23
Entertainment Tax v. Service Tax
Direct to Home (‘DTH’) Operators- Broadcasting services- leviable to service
tax and entertainment tax
Bharti Telemedia Limited v. State of
Jharkhand 2014(1)J.L.J.R.635
ISSUE
Whether entertainment tax is the levy on
'broadcasting service' on which service tax is
leviable or falls under Entry 62 of List II
Tata Sky Limited v. State of Punjab
[2011] 37 VST 1
Issue
Whether levy of entertainment tax is
covered is covered under Entry 62 of List
II
HELD
There 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
HELD
The 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.
24
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