By TIOL News Service

NEW DELHI, MAY 05, 2016: THE issue is: Whether the assessee, who is a licensee in respect of certain advertisement display sites, is liable to pay VAT on the revenue earned from display of advertisement at the Sites, even if the there is no transfer of any right to use those sites. NO is the answer.

Facts of the case

The Delhi International Airport Ltd. had entered into Operations, Management and Development Agreement with the Airport Authority of India whereby AAI has granted DIAL, the exclusive right and authority to operate, maintain, develop, design, construct, upgrade, modernize, finance and manage the Indira Gandhi International Airport. With the view to develop, setup, operate, maintain and manage various sites for display of advertisement, DIAL issued a Request For Proposal requesting interested parties to bid for participating in a joint venture company which would be: (i) licensed for establishing, setting up, developing, operating, maintaining and managing the Sites for display of advertisements; and (ii) granted rights to procure install and maintain Master Antenna Television Screens (MATV) and wall clocks at certain locations and display of brand logos in terms of the Sponsorship Agreement. Assessee successfully participated in the bidding process and was granted the licence for designing, setting up, developing, operating and maintaining the Sites for display of advertisements in terms of a licence agreement. The Sites were located within or in the vicinity of the Indira Gandhi International Airport, which is a secured area, and as such, access to the Sites is highly restricted. The assessee asserts that its business model was that it enters into agreements with various persons including advertisement agencies in terms of which the advertisement content and/or advertisement material was provided by the advertiser. The assessee then prints and mounts the advertisement at the Sites and was remunerated for the same. DIAL had also entered into a Sponsorship Agreement and a supplementary agreement with the assessee whereby, assessee had been granted a nonexclusive licence for procuring, acquiring, installing, managing, maintaining and upgrading 318 nos. MATVs at designated locations at IGIA. Assessee was licensed to display brand logos on the said screens. Assessee stated that pursuant to the aforesaid agreement, the assessee had entered into an agreement with M/s LG Electronics India Pvt. Ltd. for installation of 318 MATVs at various display sites at Terminal-3 of IGIA. According to assessee, it was rendering a service which falls within the taxable services of "sale of space or time for advertisement" as defined u/s 65(105) (zzzm) of the Finance Act, 1994, which has been kept in the negative list, therefore exempt from payment of service tax. As a result of Tribunal order where it is held that held hoardings to be goods and letting of such hoardings as constituting a transfer of rights to use goods, VATO issued a notice u/s 59 calling upon the assessee to submit details in respect of financial years 2009-10, 2010-11, 2011-12 and 2012-13 for the purposes of assessment under the DVAT Act. The assessee replied that it was not engaged in any transaction that would constitute a sale within the meaning of clause (zc) of Sub-section (1) of Section 2 of the DVAT Act. The contention advanced by assessee was not accepted and the VATO issued separate notices of default assessment in respect of the financial years 2010-11 and 2011-12 imposing VAT, Interest and penalty.

Held that,

++ taxing a transaction of rendering service would fall outside the legislative competence of a State legislature and thus, even by a device of legal fiction, such transactions cannot be subjected to levy of Sales Tax or VAT. In Gujarat Ambuja Cements Ltd. v. Union of India: (2005) 274 ITR 194 (SC), SC had held that "This mutual exclusivity which has been reflected in Article 246(1) means that taxing entries must be construed so as to maintain exclusivity. Although generally speaking a liberal interpretation must be given to taxing entries, this would not bring within its purview a tax on subject matter which a fair reading of the entry does not cover. If in substance, the statute is not referable to a field given to the State, the court will not by any principle of interpretation allow a statute not covered by it to intrude upon this field. Following the aforesaid decision, SC in Bharat Sanchar Nigam Ltd. v. Union of India: 2006-TIOL-15-SC-CT-LB, held that: "No one denies the legislative competence of the States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Article 366(29-A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales Tax. However, in Bharat Sanchar Nigam Limited, the SC explained that the Aspect doctrine only dealt with the issue of legislative competence. In a later decision in Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes &Ors.: 2008-TIOL-04-SC-VAT, the Supreme Court unequivocally held that the levy of service tax and VAT were mutually exclusive and even in cases of composite contracts, sales tax would not be payable on the value of the entire contract irrespective of the element of service provided;

++ in cases where the contracts are indivisible - other than those contracts which are by legal fiction deemed to be divisible under Article 366 (29-A) of the Constitution of India - the intention of the parties to the transaction would be material. While, considering the issue whether providing SIM Cards would be chargeable to sales tax, the SC, in Bharat Sanchar Nigam Limited held that if a transaction has been held to be one of providing services then the same would not be chargeable to VAT. The dominant object of the transaction would be determinative of the nature of the transaction and consequently, dispositive of the question whether the same could be assessed as a 'sale' within the meaning of Section 2(1)(zc). The fact that the Assessee has filed its returns for service tax and also paid service tax may not be determinative of the true nature of the transaction and certainly, the authorities under the DVAT cannot be precluded from independently examining the transactions in question. The objections filed by the Petitioner against notices of default assessment are pending consideration before the Objection Hearing Authority and, therefore, we do not consider it apposite to determine the question whether the transaction entered into by the Petitioner or the revenue earned by it would be assessable to VAT as a deemed sale by virtue of clause (vi) of Section 2(1)(zc) of the DVAT Act, that is, whether there is any 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. However, we feel that it is necessary to reiterate certain established principles. Clause (vi) of Section 2(1)(zc) of the DVAT Act is identically worded as clause (d) of Article 366 (29-A) of the Constitution of India. It is important to note that under the expanded scope of 'tax on the sale or purchase of goods', tax on transfer of the right to use goods has been included; this is not the same as a tax on the use of goods and the two expressions cannot be read synonymously. Therefore, for a transaction to fall within the meaning of Section 2(1)(zc)(vi), it is necessary that there should be a transfer of the right to use;

++ in the facts of the present case, it would be necessary for the authorities to examine the transactions entered into by the Petitioner from the stand point whether there has been any transfer of the right to use the Sites under the agreement entered into by the Petitioner with the advertisers. Prima facie, on a plain reading of the Licence Agreement dated 17th August, 2010 entered into between DIAL and the Petitioner, it is difficult to accept that the Petitioner acquired any right to transfer any right to use the Sites in question. The licence granted to the Petitioner is defined in the Licence Agreement, as the license for designing, setting up, developing, managing, operating and maintaining the Sites for display of the Advertisements thereat pursuant to the execution of the License Agreement awarded to the Selected Bidder for the License Term. On a plain reading of the aforementioned definition, it is doubtful whether the Petitioner would have any right to transfer any right to use the Sites in question. It is also important to examine the Petitioner's contention that the Sites were being used by the Petitioner for rendering services and no right to use the Sites had in fact been transferred by the Petitioner. Merely, because the advertisements of the advertisers were displayed on the Sites would not necessarily lead to the conclusion that they had acquired the right to use the Sites;

++ it is also relevant to state that a transfer of the right to use goods also entails delivery of the goods in question. In Bharat Sanchar Nigam Ltd. the SC opined that "....the essence of the right under Article 366(29-A)(d) is that it relates to user of goods. It may be that the actual delivery of the goods is not necessary for effecting the transfer of the right to use the goods but the goods must be available at the time of transfer, must be deliverable and delivered at some stage. It is assumed, at the time of execution of any agreement to transfer the right to use, that the goods are available and deliverable. If the goods, or what is claimed to be goods by the respondents, are not deliverable at all by the service providers to the subscribers, the question of the right to use those goods, would not arise." In the present case, it is not disputed that the Sites in question are located in a restricted area and none of the advertisers have an unmitigated access to those Sites; the Petitioner affirms that possession of the Sites is retained by DIAL. In the circumstances, it would be difficult to accept the view that the transactions entered into by the Petitioner with the advertisers constituted transfer of the right to use the Sites in question. Insofar as the challenge to the order dated 6th April, 2011 passed by the Commissioner under Section 85 of the DVAT Act is concerned, it is obvious that the aforesaid order must be applied keeping in view the facts of each case. The said order cannot be read to mean that in every case where advertisements are displayed on hoardings, panels, display boards, kiosks, etc., the advertisers would be liable to pay VAT on the amount received for display of such advertisements. The said decision has limited application and would be applicable only in cases where it is found as a matter of fact that there has been a transfer of right to use hoardings, panels, display boards, etc. which constitute goods. Clearly, the said decision cannot be applied where the necessary concomitants of sale u/s 2(1)(zc)(vi) are absent – there has been no transfer of the right to use 'goods' and/or the possession of the goods in question is retained by the owner and not transferred to the advertisers;

++ the decision in the case of Selvel Advertising Pvt. Ltd. also cannot be read as an authority for the proposition that in all cases where advertisements are displayed on hoardings, the revenue earned would be chargeable to VAT. However in cases where the hoardings, display boards, etc. are found to be movable property (i.e. goods) and there is a transfer of the right to use such hoardings in favour of the advertisers, the ratio decidendi of Selvel Advertising would be applicable and the consideration received for the right to use hoardings could undoubtedly be bought to tax if the provisions of the relevant taxing statute contain clauses, which are similarly worded as Article 366 (29-A) of the Constitution of India. In the case of Upasana Finance Ltd., the Tamil Nadu Taxation Special Tribunals had itself clarified that it would have to be found on facts "whether a person who erects the hoardings only lets on hire the hoardings for display of advertisements or whether he also undertakes the job of designing the advertisements and painting the hoardings. Even here the two transactions are clearly separable. For the hire-charges of the hoardings, the person who erects is certainly liable to be taxed u/s 3-A. This will depend upon the facts of each case." Clearly, the question whether a transaction entails transfer of the right to use would have to be examined by ascertaining the true nature and intention of the parties and whether the necessary ingredients of sale are present. The Tribunal's decision, in Upasana Finance Ltd., to the extent that it holds that possession of the hoardings is not relevant, cannot be accepted in light of the unequivocal view expressed by SC in Bharat Sanchar Nigam Ltd. In the given facts of this case, we modify the order dated 7th February, 2014 (as rectified by the order dated 13th February, 2014) and direct the Special Commissioner to consider the objections filed by the Petitioner in light of the observations made in this order without insisting on pre-deposit of any amount. With regard to the impugned notices u/s 59 of the DVAT Act dated 8th May 2013 and 21st October 2013 requiring the Petitioner to produce documents stated therein for the period of 2012-13, the court directs the assessment be completed keeping in view the observations made in this order. The petition is disposed of in the above terms. The pending application also stands disposed of. The parties are left to bear their own costs.

(See 2016-TIOL-878-HC-DEL-VAT)