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Northern India Regional Council of ICAI

Northern India Regional Council of ICAI. Seminar on Simultaneous Applicability of Service Tax and VAT on Contracts January 20, 2007. Double Taxation What is Service? Service vs. Sale K. Raheja Case Composite vs. Multiple Double Non-taxation?. Contents. DOUBLE TAXATION.

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Northern India Regional Council of ICAI

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  1. Northern India Regional Councilof ICAI Seminar on Simultaneous Applicability of Service Tax and VAT on Contracts January 20, 2007 P. K. Sahu, Advocate

  2. Double Taxation What is Service? Service vs. Sale K. Raheja Case Composite vs. Multiple Double Non-taxation? Contents P. K. Sahu, Advocate

  3. DOUBLE TAXATION Why this confusion?

  4. Supreme Court on Double Taxation • Different competing taxing authorities under different Acts can impose tax on the same subject matter and this would not amount to double taxation. [Radhakisan Rathi v. Additional Collector, (1995) 4 SCC 309] • Where more than one legislative authority, such as the State legislature and a local or municipal body, possess the power to levy a tax, there is nothing in the Constitution to prevent the same person or property being subject to both the State and municipal taxation or the same legislature exercising its power twice for different purposes. [Sri Krishna Das v. Town Area Committee,(1990) 3 SCC 645] P. K. Sahu, Advocate

  5. Supreme Court on Double Taxation • There is nothing in Article 265 of the Constitution from which one can spin out the Constitutional vice called double taxation (Bad economics may be good law and vice versa). [Avinder Singh v. State of Punjab, (1979) 1 SCC 137] • Some undeserving contentions die hard, rather survive after death. The only epitaph we may inscribe is: Rest in peace and don’t be re-born! If on the same subject-matter the legislature chooses to levy tax twice over there is no inherent invalidity in the fiscal adventure save where other prohibitions exist. [Supreme Court quoted Bombay High Court in Cantonment Board v. Western India Theatres Ltd., AIR 1954 Bom 261 in the above case] P. K. Sahu, Advocate

  6. No Double Taxation • Taxes are imposed by different States • One of the impositions is not a tax • One tax is on property and the other tax is not a property tax • Double taxation is indirect rather than direct [Shri Krishna Das vs. Town Area Committee, (1990) 3 SCC 645: (1990) 183 ITR 401(SC)] P. K. Sahu, Advocate

  7. Is There A Double Taxation? • Hotel Receipts Tax Act, 1980 • Expenditure Tax Act, 1987 • Paddy and rice figuring in same taxing schedule • Tax on refined oil obtained by processing crude oil which has already suffered tax • Tax on logs sawn from timber purchased by contractor paying tax P. K. Sahu, Advocate

  8. What is Service? P. K. Sahu, Advocate

  9. Service • An act of labour or performance • For the benefit of somebody • That does not result in the transfer to customer ownership of anything • Its production may or may not be tied to a physical product • Intangible, inseparable from the production, variable and perishable P. K. Sahu, Advocate

  10. SERVICE VS. SALE

  11. Service vs. Sale Service The principal object of work undertaken is one of work and labour [Assistant Sales tax officer vs. B C Camay (1997) 39 STC 237(SC)] Sale Main object is the transfer of property in, and the delivery of possession as, a chattel to the buyer. P. K. Sahu, Advocate

  12. Judgments • Escotel Mobile Communication Ltd.vs. UOI, (2002) 126 STC 475 (Ker) – Sale of SIM Card • State of Uttar Pradesh vs. UOI,(2003) 130 STC1(SC) – Supply of telephone facility – Transfer of right to use goods? • Bharat Sanchar Nigam Ltd. vs. UOI, JT 2006 (6) SC 114 P. K. Sahu, Advocate

  13. St. of A.P. vs. Kone Elevators (Ind) Ltd., (2005) 3 SCC 389 • Site preparation by customer • Lift supplied in knocked-down condition • Skill and labour in installing is only incidental • Contract of sale of goods and not works contract P. K. Sahu, Advocate

  14. Hindustan Shipyard Ltd. vs. St. of A. P.(2000) 119 STC 533 (SC) If the thing to be delivered has any individual existence before the delivery as the sole property of the party who is to deliver it, then it is a sale. P. K. Sahu, Advocate

  15. K. Raheja Development Corporation vs. State of Karnataka, (2005) 141 STC 291 (SC) Analysis of Judgement

  16. K. Raheja Devpt. Corpn. vs. St. of Karnataka, (2005) 141 STC 291 (SC) • Property developer - Agreement with owner of land and getting plan sanctioned • Agreement for sale with intending purchasers • Agreement in two parts: (i) Sale of undivided interest in land, and (ii) construction of flat on behalf of intending purchaser • Purchasers paying in installments P. K. Sahu, Advocate

  17. Package Deal • K. Raheja Development Corporation (as holders) agree to sell to the prospective purchaser an undivided 0.42% share of property in land for Rs.3,25,000/-. • K. Raheja Development Corporation (as developers) agree to build “Raheja Tower” having the unit to belong to the prospective purchaser for Rs.5,07,000/-. Possession to be handed over only after payment of full consideration. P. K. Sahu, Advocate

  18. Findings of Supreme Court • “Works contract” in Karnataka Act is inclusive and is not confined to a works contract as normally understood. • It includes “any agreement” for carrying out building or construction activity. • The definition does not make a distinction on basis of who carries on the construction activity. • Even an owner of the property may carry on works contract, if he enters into an agreement to construct. P. K. Sahu, Advocate

  19. Judgement per incuriam? • Definition of “works contract” in Karnataka Act is similar to those of other States. • Ownership does not pass to prospective purchaser until full consideration paid and possession is handed over. • If the thing to be delivered has individual existence before the delivery as the property of the party who is to deliver it, then it is a sale – (Hindustan Shipyard Ltd. vs. State of A. P. (2000) 119 STC 533 and State of Andhra Pradesh vs. Kone Elevators (India) ltd., 2005 (3) SCC 89). >>> P. K. Sahu, Advocate

  20. Judgement per incuriam?.... • Where there are separate agreements for letting a building and for hiring the furniture, the intention of the parties is to enjoy both the things together – Five Judge Bench of S.C. in Sultan Bros. (P) Ltd. vs. CIT, (1964) 51 ITR 353 (SC) • In a building construction contract, the title passes to the owner as an accretion to the land belonging to the customer – Five judge bench of S.C. in State of Madras vs. Gannon Dunkerley & Co. (Madras) Ltd., 1959 SCR 379(SC) • Construction of a ship according to the specification of the customer is a transaction for sale of goods, and not for works contract – Hindustan Shipyard Ltd. vs. State of A. P. (2000) 119 STC 533 (SC) P. K. Sahu, Advocate

  21. K. Raheja Case Impact on Service Tax

  22. Commercial or Industrial Construction Service • Construction of a new building or a civil structure or a part thereof • Construction of pipeline or conduit • Completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and Wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure • Repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit >>> P. K. Sahu, Advocate

  23. Commercial or Industrial Construction Service • It should be primarily used for/ occupied with/ engaged in or to be used for/ occupied with/ engaged in commerce or industry, or work intended for commerce or industry, • Exclusions: In respect of roads, airports, railways, transport terminals, bridges, tunnels and dams >>> P. K. Sahu, Advocate

  24. Construction of Complex • Construction of a new residential complex or a part thereof • Completion and finishing services in relation to residential complex such as glazing, plastering, painting, and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services • Repair, alteration, renovation or restoration of, or similar services in relation to residential complex >>> P. K. Sahu, Advocate

  25. Residential Complex Any complex comprising of - (i) a building or buildings, having more than twelve residential units; (ii) a common area; and • any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system, located within a premises and the layout of such premises is approved by an authority under any law for the time being in force. >>> P. K. Sahu, Advocate

  26. Residential Complex … • Does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person. • “Personal use" includes permitting the complex for use as residence by another person on rent or without consideration. • “Residential unit" means a single house or a single apartment intended for use as a place of residence. P. K. Sahu, Advocate

  27. K. Raheja ratio has no application • If the contract is for sale of flat for a single consideration and, therefore, no recital for construction of unit on behalf of purchaser. • Estate builders who construct buildings/civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers – Circular F.No.B2/8/2004-TRU dated 10.09.2004, explaining the scope of service for construction of commercial and industrial buildings or civil structures. >>> P. K. Sahu, Advocate

  28. K. Raheja ratio has no application … • A single flat in not a complex • Residential complex having less than 13 residential units would not be taxable – Circular no. B1/06/2005-TRU dated 27.7.2005 • Residential complex constructed by an individual, which is intended for personal use as residence (including permitting another person to use it on rent or otherwise) is not subject to service tax – Definition of “residential complex” in section 65(91a) *** P. K. Sahu, Advocate

  29. COMPOSITE OR MULTIPLE

  30. State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., (1958)9 STC 353(SC) But we are concerned here with a building contract, and in the case of such a contract, the theory that it can be broken up into its component parts and as regards one of them it can be said that there is a sale must fail both on the grounds that there is no agreement to sell materials as such, and that property in them does not pass as movables. P. K. Sahu, Advocate

  31. Sentinel Rolling Shutters and Engg. Co. (P) Ltd. v. CST, (1978) 4 SCC 260 The true nature of the contract cannot depend on the mode of payment of the amount provided in the contract. The parties may provide by mutual agreement that the amount stipulated in the contract may be paid at different stages of the execution of the contract, but that cannot make the contract one for sale of goods if it is otherwise a contract for work and labour. P. K. Sahu, Advocate

  32. Sultan Brothers Pvt. Ltd. Vs. CIT, (1964) 51 ITR 353 (SC) • Composite letting of building fitted with furniture and fixtures for the purpose of being run as a hotel • Tests for inseparability – It seems to us that the inseparability arises from the intention of the parties. That intention may be ascertained by framing the following questions : Was it the intention in making the lease - and it matters not whether there is one lease or two, that is, separate leases in respect of the furniture and the building - that the two should be enjoyed together? Was it the intention to make the letting of the two practically one letting? Would one have been let alone and a lease of it accepted without the other ? P. K. Sahu, Advocate

  33. British Airways plc v s. Customs and Excise Commissioners [1990] STC 643 • There is no two supplies of services one of inflight catering and other of air transport. • It is a single supply of air transport serving Service of food is not an aim for the passenger in itself but for better enjoyment of the main service of air transport. • Whether it is necessary for the main supply is not a relevant question. P. K. Sahu, Advocate

  34. Card Protection Plan Ltd vs. Customs and Excise Commissioners [1999] STC 270 ECJ • There was a single supply where one or more elements constituted the principal service and others were merely ancillary, in that they did not constitute for customers aims in themselves, but simply a means of better enjoying the principal service. • What constitutes a single supply in economic sense should not be artificially split. P. K. Sahu, Advocate

  35. Customs and Excise Commissioners vs. British Telecommunications plc [1999] STC 758 • Sale and supply of car. • Delivery charges shown separately in the invoice does not imply that BT was getting a supply of service of delivery apart from supply (sale) of cars. • There was a single supply of purchase of a delivered car. Delivery was incidental to supply of the car. • The fact that delivery could have been separately arranged from different party is not material. P. K. Sahu, Advocate

  36. Pilgrims Language Courses Ltd vs. Customs and Excise Commissioners [1999] STC 874 • Provision of transport from airport, accommodation, catering, recreation, etc. are incidental to language teaching course. • These do not constitute the main aim of the student. There is a single supply of providing education. P. K. Sahu, Advocate

  37. Daelim Indl. Co. vs. CCE, Vadodara, 2003 (155) E.L.T. 457 (Tri. - Del.) Thus, a perusal of the clauses of the contract leave no doubt that the appellant’s contract with IOC was a work contract on turnkey basis and not a consultancy contract. It is well settled that a work contract cannot be vivisected and part of it subjected to tax. The impugned orders have proceeded to do precisely that. Therefore, they are required to be set aside. P. K. Sahu, Advocate

  38. Geo Miller & Co. Pvt. Ltd. vs. State of M.P., (2004) 136 STC 241 (SC) • Clause (29A) of Article 366 defines ‘tax on the sale or purchase of goods ’. • This phrase is used in Schedule VII, in List I, Entries 92 and 92A and List II Entry 54. • The extended meaning could not be imported for the purposes of Entry 52 of List II. P. K. Sahu, Advocate

  39. The service forms part of main supply and is not an aim in itself. The alleged separate supply is incidental to or an integral part of over all supply. Whether the alleged separate supply is economically indissociable from the other aspects of the contract. … Tests for Compositeness of Contract P. K. Sahu, Advocate

  40. VAT or Service Tax or Both • Both the tax apply simultaneously. There is no precedence of any of the tax laws. • If contract price is Rs.100 plus taxes and VAT rate is A% VAT = Rs.100 x [A/(100 + A)] ST = Rs.100 x (12.4/112.4) • In case of availing abatement ST = Rs.100 x (33/100) x (12.4/112.4) • Customer pays = Rs.100 + VAT + ST Is this computation correct? P. K. Sahu, Advocate

  41. Abatement in ST and Compounding in VAT Assumptions Contract Price (CP) = 1,00,000+ST+VAT VAT = CP x 0.04 ST = CP x 0.33 x (10.2/110.2) = CP x 0.0305444646 P. K. Sahu, Advocate

  42. Computation of ST and VAT CP = Rs.1,00,000 + VAT + ST = Rs.1,00,000 + (CP x 0.04) + (CP x 0.0305444646) = Rs.1,00,000 + (CP x 0.0705444646) OR CP x (1 – 0.0705444646) = Rs.1,00,000 OR CP = Rs.(1,00,000/0.9294555354) = Rs.107589.869758 OR CP = Rs.107590 VAT = 107590 x 0.04= Rs.4304 ST = 107590 x 0.0305444646= Rs.3286 CP = Rs.1,00,000 + Rs.4,304 + Rs.3,286 P. K. Sahu, Advocate

  43. DOUBLE NON-TAXATION?

  44. Sunrise Associates Vs. Government of NCT of Delhi, (2006) 45 STC 576 (SC) • Lottery tickets are actionable claims not goods for sales tax • Actionable claims are excluded from definition of “goods” in all sales tax legislations P. K. Sahu, Advocate

  45. Thank You ! P. K. Sahu, Advocate

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