15th Study Circle Meeting held on 29th June, 2006

Subject: Import of Services and Valuation Rules under Service Tax Enactment

Speaker: Shri G. S. Jetly,
Senior Advocate

Giving brief details of how and when Service Tax was introduced, the learned speaker Shri Jetly saheb said that originally there were only 3 heads of services e.g Insurance, Stock Exchange and the like, but today we have around 97 services which are taxable. The learned speaker wanted to share his experiences while dealing with the service tax matters and specially in a context to amounts that are recovered by way of sale. You sell something and you recover something and whether you call it liable to service tax or it should be sales tax?

Hire finance charges/hire premium charges

Citing a case law in case of one of his clients, the learned speaker discussed the question that arose before the Hon'ble Tribunal as to whether the amount of Hire Finance Charges or premium paid in case of sale of vehicle, included in equated instalments, attracted sales tax or service tax?. The learned speaker argued before the Hon. Tribunal that hire premium charges do not form part of sale price and therefore no sales tax is leviable but only service tax is attracted.

Service tax and legislature

The learned speaker asked, a question which is the Legislative body that can frame a law relating Service Tax. He said it is the Parliament, which can frame a Law relating to service tax. Distribution of power, under our Constitution is as under:–

List – 1 : Is exclusively within the domain of Parliament.
List – 2 : Pertains to the State Legislature and
List – 3 : Is a concurrent List; i.e., Parliament also can Legislate and State also can Legislate. But in case of conflict between the two, the Parliament’s Legislation will prevail over the State Legislation.

Asking further a crucial question what happens to those items which do not come either in List 1, or List 2, or List 3 ?. The learned speaker said that service tax is the one, which do not come under any of the 3 Lists. It was then decided that service is included in the residual entry in the List – A. The learned speaker said that removing such type of unclarity, service tax is now brought in entry 83 – C in the List – 1 within the exclusive power of Parliament. Clarifying the position relating to Interest / Hire Premium Charges the learned speaker said that today as the law stands, the same are exclusively taxable under the Service Tax. Sales Tax is not applicable. But to the utter surprise of the learned speaker, a reference applicable, made by the Commissioner of Sales Tax against this clear decision of the Hon. Tribunal, was admitted by the High Court. Shri Jetly Saheb felt that by 2007 there will be some devolution of power in favour of State Government to levy service tax on certain topics by the State Government itself and not by the Central Government.

Deduction for levy of service tax from consolidated bill

Giving example of a photographer who does not charge separately, for supplying a film but prepares a consolidated bill for services and supply of a film, the learned speaker cautioned the members that the full service tax is payable on the whole of the amount of the bill without getting any deduction for cost of film supplied. He further said that it is not very easy to decide what lies within the domain of service tax and what lies within the domain of sales tax.

Tax on import of services

At the outset the learned speaker categorically said that under Article 286 of the Constitution there is no tax on imported goods which are not sold. But under the service tax Act, if the service provider has no permanent place of business in the country; has no office in India and gives services from abroad, it is the receiver of the services who has to pay tax on the value of services received by him, which they call as “ Reverse Charge“. This is astonishing, the learned speaker said. He scared, there may be tax on merely import of goods.

Tax on Intellectual Property

Intellectual properties can be Goodwill, Copy Right, Patent, Trademark and the like. The learned speaker asked categorically when Goodwill is sold, how there can be service tax? on sale, there can be sales tax. Service tax can be levied on services, which are rendered for a particular time. The learned speaker therefore found it surprising how service tax can be levied on intellectual property, when they have been sold for consideration.

Resolving disputes relating to levy of service tax

The learned speaker felt that today there is no one to help in resolving the disputes regarding levy of service tax. If one has any doubt whether tax is leviable on a particular type of service, there is no one to clear one’s doubt and give correct position in Law. The learned speaker felt sorry to say that though there are provisions available in Excise Duty Act, similar to the provisions in Sales Tax Act for DDQ, the conditions attached for advance ruling under service tax is that one of the parties to the proceedings should be Non-Resident. Under the circumstances, it is not possible to get Advance Ruling from appropriate authority for an individual person, who has no partnership with a Non Resident or who has not entered into an agreement with a Non-Resident party.

Turn key projects/Works contract and service tax

According to the Supreme Court, no service tax can be levied on turn-key project or Works Contract. In case of Pandal or Mandap Keeper, Excise people say service tax is payable. But they have made a provision, that not on the entire amount, service tax is payable. There is abatement of 60%, 40%, etc. and for that abatement Sales Tax Department can levy tax.

Computer software

Computer software, the learned speaker said, has been held to be goods. Service tax is not being levied on computer software packages. But on repairs and maintenance thereof, there is service tax. On export of computer software, there is no service tax but on repairs and maintenance of exported software there is service tax leviable. This, the learned speaker found unimaginable.

Concluding his speech, the learned speaker gave the following important tips in relation to levy of service tax:

1. On intellectual properties like Goodwill Copy Right etc. , there can not be service tax. If, the same are sold for a particular amount; i.e., consideration.
    

2. Consulting Engineers :
   A company cannot be consulting engineers. A proprietary concern or a partnership firm can be. This is now settled by the Supreme Court. But by an amendment brought through Finance Act, 2006, even a company has been included in the “definition“ of Consulting Engineers.
    

3. For the word “commercial concern“, the word “person“ has been now used at several places. The word “Person“ includes an individual, an HUF, a limited Co., a body of individuals and all those.
    

4. Mysore High Court said on Sim CARD, both the service tax and the sales tax can be levied. But Supreme Court in case of Bharat Sanchar Nigam Limited said on Sim Card no service tax can be levied, neither sales tax. Sim Card if sold; off-the-shelf, then possibly sales tax could be levied.
    

5. On export of services, there is no Service Tax. However on import of services there is service tax payable by service receiver by way of what is called “reverse – charge“.

In the hope of early introduction of G.S.T; i.e., Tax on Goods and Services, the learned speaker ended his talk.
Shri Jetly Saheb replied various queries raised by the members.

The meeting ended with a sincere vote of thanks.

13th Study Circle Meeting held on 5th April, 2006

Subject: Levy of Sales Tax on services liable to Service Tax in the context of recent Supreme Court Judgment – BSNL

At the outset the learned speaker said that according to Article 141 of the Constitution, a judgment of Supreme Court is the law of the land and is binding on all the authorities in the country. In other words no court can take a contrary view than the one taken by the Supreme Court. Then a question arose in the initial stage before the Supreme Court, that how far it would be good for one division bench to depart from the decision of another division bench. The question was referred to larger bench consisting 9 judges and it is decided in the case of Naresh Sridhar Marajkar vs. State of Maharashtra (AIR 1967 Page 1 S.C.) by this larger bench that unless a judgement in question is overturned or overruled by a due process of law, no division bench should easily depart from the judgement of the earlier division bench. A division bench judgement is thus always binding on the other division bench.

But off late it is observed that by the time the law is settled by the Supreme Court and a judgment is properly understood by us, there is a thunderbolt from the Supreme Court that the earlier judgement given is not a correct law. The learned speaker asked, under such scenario how one can advice one’s clients correctly? Which judgement are we to follow? Are we sure about it?

Month of March 2006: A historical month

The learned speaker said that the month of March 2006 is a very historical month for all of us because of the following important events that took place:

2nd March: A 3 judges bench upturned the earlier judgement of division bench in Union of India vs. State of U.P. (130 STC Page 1).

3rd March: Bombay High Court in Hari & Co.s case held that xerox is liable to Works Contract tax, though the Tribunal held it as a service contract.

4th March: Amendments made in Rules regarding submission of returns by the State of Maharashtra.

21st March: State Budget was presented without any relief.

On BSNL judgment

Giving details, the learned speaker informed the meeting that the said judgment is spread over 121 paras, printed in 40 pages and one and a half page consists of only names of advocates and solicitors who appeared in the case. In all, 41 judgments from various courts of the land and 5 judgments of foreign countries have been referred to by the Supreme Court in the case of BSNL. The learned speaker advised that in order to understand the judgment properly, the same should be read 3 to 4 times and not once.

Explaining the details, he said that the following matters have been referred to by the Supreme Court in BSNL judgment :

1. Problems of Service Contract:
   Rainbow Colour Lab., A.C.C., C. K. Jidheesh discussed.
    

2. Lease Transactions: 20th Century and Rashtriya Ispat Nigam discussed.
    

3. The term “Goods” discussed with reference to the decisions given in A. Dhanraj, Vikas Sales, Sunrise cases.
   Controversy before the Supreme Court

The controversy before the apex court was whether Sales Tax is leviable on telephone and mobile telephone services?

The High Courts of Andra Pradesh, Allahabad and Punjab & Haryana have held that telephone connection and Mobile phone services are rendered through the entire system. The telephone instrument or mobile phone is just a mode of rendering services and therefore no sales tax is leviable. These three judgments were overruled by the Supreme Court in 130 STC 1. Union of India vs. State of U.P. The apex court takes a view that not only telephone or mobile instrument or Sim Card was liable to Sales tax, but also the entire system; i.e., cables, telephone exchange machinery etc. were liable, because the subscriber got right to use the system.

Kerala High Court in Escotel Mobile Communication

The Kerala High Court took a view that the Sim Card is goods of incorporeal nature and value thereof is to be added to the other portion of services and is liable to Service Tax. Similarly service portion is to be added in the value of Sim Card and Sales Tax is leviable. Thus both Service Tax and Sales Tax can be leviable as both the levies are by different legislature. There is no question of double taxation.

This being the judgment of the Kerala High Court in Escotel, an appeal petition was filed in the Supreme Court by Escotel, B.P.L. and other companies. The division bench before whom the appeal came up for hearing found that the matter requires reconsideration and therefore referred it to and to be decided by the larger bench and therefore the judgment in BSNL.

All the writ petitions under Article 32 plus appeal by Escotel were decided by the larger bench in BSNL’s case.

In the meantime against the decision in the case of Union of India vs. State of U.P. 130 STC 1 S.C. wherein a view is taken that everything is taxable, a Review Petition is filed which at present pending in the Supreme Court.
The question before the Supreme Court in BSNL case was what is the nature of transaction in case of rendering telephone services – landline, mobile or both. The question was whether it is a sale liable to sales tax or it is a service liable to service tax or both Sales Tax and Service Tax?

Turning down the preliminary objection taken by the states on the principles of “res judicata”, the larger bench said that as far as taxation matters are concerned and specially where there are different periods of assessment, there is no question of “res judicata” being followed.

Petitioner’s arguments : (BSNL, VSNL, MTNL, Escotel)

All the petitioners argued before the larger bench that they render only services. Dominant object of anybody approaching us is to get service and that instrument is just a tool/or mode and therefore there should be no tax under the sales tax laws. According to them, the whole action to levy tax by the State was unconstitutional because only Parliament is having right to levy tax on the transaction of such nature.

The petitioners further demanded that the decision in 130 STC 1 should on this count, be overruled.

The stand of petitioners was supported by the Union of India by saying that all of them were rendering services and therefore no sales tax could be levied.

Transactions covered by Article 366:29A (a to f)

It was further submitted before the larger bench that if a transaction does not fall within the category of sub-clauses (a) to (f) (deemed sale) of clause 29A of Article 366, no tax can be levied by the State on such transactions and if levied the same would be unconstitutional. For this purpose petitioners relied on the famous case of Everest Copier, Hindustan Aeronautics and Rainbow Colour Lab.

It was also argued that for providing a telephone service the entire system is required to be used and not merely a telephone or mobile instrument. An instrument is required to be “connected” with the exchange and a sim card is to be “activated”. The telephone instrument in itself is not a system and therefore no sales tax can be levied.

It was also argued further that the State’s attempt to levy tax, considering the transactions as that of “lease” for using radio frequencies and wave lengths, is also not correct because complete possession and effective control remain with the lessor i.e., Telephone Company and not with the lessee; i.e., telephone user.

Expression “Telephone” as defined in Telegraph Act

“Telephone” as defined, do not include any Service. A subscriber, as a matter of right, uses the instrument. The instrument cannot be called an immovable property. The company is charging rental for using the instrument and therefore there is a complete transfer of right to use the instrument including the sim card in case of mobile. They also contended that rendering service of telephone and using telephone instrument are two distinct and separate transactions, unconnected with each other. On both the transactions tax can be levied. On service portion, service tax and on instrument Sales Tax.

366 : 29A(d) “Right to use goods for any purpose”

They argued further that “any purpose” would include services also and therefore tax is rightly covered under Articles 366, 29A(d). After the 46th amendment the concept of dominant intention of getting services only, has gone. The moment there is transfer of right to use, the tax is attracted. Transfer of right to use radio frequency and wave length assigned to a particular service provider being intangible and incorporeal asset, attract the lease tax under Article 366, 29A (d).

Issues before the Supreme Court

The learned speaker therefore said that before the Supreme Court the following five issues were there to be considered:

1. Whether telecommunication transactions involve any “goods” within the words “goods” used in the Articles 366, 29A(d)? (Lease)

2. Whether there is any transfer of right to use goods involved in providing the services in question, Articles 366, 29A(d) and whether access to telephone facility to subscriber involve any transfer of right to use any goods?

3. Whether there was a transaction of composite nature involving sale and service. If so, whether sale portion can be taxed?

4. Whether the transactions involve any inter-State sales?

5. Can “aspect theory” be relied on by the States for levying sales tax on the same transaction on which Parliament have levied Service Tax?

The learned speaker informed that while considering the above five issues before it, the Supreme Court referred to the historical background right from 9 STC 353 to the passing of the 46th amendment to the Constitution and observed that each and every non sale transactions of Articles 366, 29A (a) to (f) involve absence of some or the other necessary ingredient for the purpose of sales as understood under the Sale of Goods Act. The 46th amendment was brought to do away with the effect of the court judgment, favorable to the dealers on each type of transactions covered by the sub-clauses (a) to (f). These all transactions related to the supply of goods by unincorporated entities. Now by the 46th amendment these all transactions covered by sub-clauses (a) to (f) of clause 29A of Article 366, entered into by any person, buyer or seller are transactions considered to be “deemed sale” and therefore liable to tax. However the Supreme Court stated that this fiction created by the 46th amendment applies only to those six transactions covered in sub-clauses (a) to (f) of 29A and nothing more. In other words one cannot assume a transaction to be that of sale, try to levy tax and then find out what is the portion of goods which is liable to Sales Tax even though there is incidental use of materials in the course of services etc. The theory of “Divisible Contract” can apply only to these six type of transactions.

Para 43 of the judgment

The learned speaker said that Para No. 43 of the judgment is very important for all of us. It says that there are two aspects of the matter which have survived the amendment of 366, 29A. In other words, two aspects have not touched the amendment of 366, 29A(b) in works contract:

1. The word “Sale” has to be considered as understood in the Sale of Goods Act. All transactions which are not expressly covered by (a) to (f) of 29A, are not hit by the amendment. If all the ingredients of “sale of goods” are present, the department cannot say it is a transactions within 46th amendment.
    

2. All the sub-clauses (a) to (f) of 29A do not contain goods. It is only three sub-clauses; i.e., (b),(c) and (f) which contains goods. If transfer of good in (b), (c) and (f) is according to “Sale of Goods Act”, no tax can be levied under Articles 366, 29A, because all the ingredients of “sale” are present.

The learned Speaker said that unfortunately the life of C. K. Jidheesh was only for about 4 months. In BSNL, three judges found that observations of Jidheesh in regard to ACC was not correct. And ACC’s observation regarding Rainbow was correct. This is very unhappy, the learned speaker said. He felt that unless BSNL’s judgment is reversed by the 5 judges bench or larger bench, there is no hope. At present, the learned speaker opined, C.K. Jidheesh and Rainbow Colour judgments are done away with.

However the learned speaker made the remarks that by BSNL’s judgment, everything is not lost. There is a window kept open by the Supreme Court itself. Acc has never said that in all composite transactions 366, 29A will apply. Therefore if your category of transactions is not covered by (a) to (f) of 29A, you are outside the preview of 46th amendment and in those cases again dominant intention will come into picture. This will help us.

The learned speaker highlighted this fact by saying that the purchaser and the seller of the goods should have the “same idea” regarding purchase and sale of goods. If there is a difference, the same will not be a transaction of sale. Therefore the “intention” must be found out. The learned speaker informed that the theory of dominant intention is followed by the Bombay High Court in case of “Mudran Parisad (139 STC 193) even after C.K. Jidheesh, ACC and Matushree.

The learned speaker felt that some impression created for BSNL’s judgment that it has doubted 20th Century Finance, is not correct. On the contrary, he said 20th Century Finance has been discussed in detail for “situs of sale”. 20th Century Finance was not at all concerned with composite contract and its bifurcation etc. It has never said that effective control and possession of the asset is not necessary to remain with lessee. It was concerned only with the “situs of sale”.