JANUARY 03, 2007

 By S Jaikumar & G Natarajan, Advocates

APEX Court decisions are the law of the land! Like any other field, taxation also has the privilege of being guided by the landmark decisions of the Apex Court and the cases like, DCM (Manufacture), Ujagar Prints (Job work), Bombay Tyres & MRF (Valuation), Mafatlal (Refunds), etc are few examples. Though there are umpteen numbers of judgements on Excise, unfortunately, the new age levy, Service Tax, does not have many! Since the levy is so nascent, most of the issues are still crawling along the Revenue corridors and are yet to see the judicial light. But there are a few landmark decisions rendered by the Supreme Court on the Service tax too, namely, L.H. Sugar (GTO), Daelim (Vivisection) etc and the latest being the decision in the case of BHARAT SANCHAR NIGAM LTD Vs UNION OF INDIA-2006 (2006-TIOL-15-SC-CT-LB).

In this celebrated BSNL decision supra, the Apex Court addressed a very vital issue. The decision was so explanatory and exhaustive that a cruise along the judgement, in its own words itself, would suffice to enlighten. The issue framed by the Apex court was,

"The principal question to be decided in these matters is the nature of the transaction by which mobile phone connections are enjoyed. Is it a sale or is it a service or is it both? If it is a sale then the States are legislatively competent to levy sales tax on the transaction under Entry 54 List II of the Seventh Schedule to the Constitution. If it is a service then the Central Government alone can levy service tax under Entry 97 of List I (or Entry 92C of List I after 2003). And if the nature of the transaction partakes of the character of both sale and service, then the moot question would be whether both legislative authorities could levy their separate taxes together or only one of them."

First, a brief about the legislative history and its amendment to Article 366(29A) of the Constitution. Prior to the 46th Amendment, composite contracts such as works contracts, hire-purchase contacts and catering contracts were not assessable as contracts for sale of goods. The Constitution (46th Amendment) Bill, 1981, which was subsequently enacted as the Constitution 46th Amendment Act, 1982 set out the background in which the amendment to Article 366(29A) of the Constitution was amended.

Article 366 was therefore amended by inserting a definition of "tax on the sale or purchase of goods" in Clause (29A). The definition reads:

"[(29A) "tax on the sale or purchase of goods" includes -

(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

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

(c) a tax on the delivery of goods on hire-purchase or any system of payment by installments;

(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;

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(f) a 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;"

Thus the above amendment especially allowed specific composite contracts viz. works contracts [Clause (b)], hire purchase contracts [Clause (c)], catering contracts [Clause (f)] by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax.

Apart from these two cases where splitting of the service and supply has been constitutionally permitted in Clauses (b) and (f) of Clause 29A of Art. 366, there is no other service which has been permitted to be so split. For example, the clauses of Art. 366 (29A), do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.

The test therefore for composite contracts other than those mentioned in Article 366 (29A) continues to be - did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention then there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract.

Now coming to the question as to what are "goods", the Apex court observed that the view adopted in Tata Consultancy Services v. State of Andhra Pradesh (2004-TIOL-87-SC-CT-LB) for the purposes of levy of sales tax on computer software is the correct approach to the question as to what are "goods" for the purposes of sales tax. The Apex Court in the Tata judgement observed as:

"A "goods" may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software whether customized or non-customised satisfies these attributes, the same would be goods".

Coming to the question of the essence of the right under Article 366 (29A)(d), the Apex court observed 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 are not deliverable at all by the service providers to the subscribers, the question of the right to use those goods, would not arise. It further held that the delivery may not be simultaneous with the transfer of the right to use. But the goods must be in existence and deliverable when the right is sought to be transferred and therefore whether the goods are incorporeal or corporeal, tangible or intangible, they must be deliverable.

After such a detailed analysis, the Hon'ble Supreme Court decided that a telephone service is nothing but a service. There is no sales element apart from the obvious one relating to the hand set, if any. That and any other accessory supplied by the service provider in our opinion remain to be taxed under the State Sales Tax Laws.

Having concluded so, the Hon'ble Supreme Court also went on to observe that,

"As has been succinctly stated in Federation of Hotel & Restaurant Association of India v. Union of India (1989) 3 SCC 634 - "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. They 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 overlapping does not detract from the distinctiveness of the aspects". No one denies the legislative competence of 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."

Thus the Apex Court answered the title poser that there is no bar as to the simultaneous levy of sales tax and service tax on a same transaction. But does the story end there?

(Also see Simultaneous levy of sales tax and service tax - Part I)

(Wait for Part III!   tomorrow)

(The views expressed are strictly personal) )