TRADING OF GOODS IS NOT A TAXABLE SERVICE

[Dr. Sanjiv Agarwal]

Trading of Goods

Trading of goods is not a taxable service, it being a sale and not a service. Conceptually, if a transaction is a sale, it is not a service and vice versa.

The above entry in negative list refers to the activity of trading of goods. Thus the check has to be two-fold - (l) the activity should be of trading and (2) trading should be of goods.

Meaning of Trade / Trading

Trade is the transfer of ownership of goods and services from one person or entity to another by getting something in exchange from the buyer. Trade is sometimes loosely called commerce or financial transaction or barter. Retail trade consists of the sale of goods or merchandise from a very fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Wholesale trade is defined as, the sale of goods or merchandise to retailers, to industrial, commercial, institutional, or other professional business users, or to other wholesalers and related subordinated services.

According to Encarta English (North America) Dictionary, trading means buying & selling the activity of buying and selling, or sometimes bartering, goods.

According to Webster’s New World Dictionary & Thesaurus, trading means buying & selling of commodities or bartering of goods, commerce.

‘Trading’ is not defined either in Central Excise Act, 1944 or the Finance Act, 1994. In common parlance, activity of buying and selling constitutes trading. In trading, seller is involved in the activity of trading by himself for his own self interest. Similarly, buyer purchases the goods in his own interests. When seller sells the goods, he may make profit or loss depending upon his cost of purchase or other expenses on sale. There is no service provided by seller to buyer as such and as such, there is no service element. Also, consideration for goods sold is not the consideration for services but for the goods purchased.

Meaning of Goods

Goods as defined under clause (25) of Section 65B of the Act means as follows –

“goods” means every kind of movable property other than actionable claim and money; and includes securities, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.

ln essence, trading of goods has been brought within the scope of Negative List of services due to following two reasons:

• Service Tax cannot be levied in respect of Goods.
• Taxes on trading [sale or purchase] of goods can be constitutionally levied by State Government only because of Entry No. 54 of List II [State List] of Seventh Schedule of the Constitution of India. According to Article 265, taxes shall not be imposed save by authority of law. No tax shall be levied or collected except by authority of law. As a consequence, Service Tax cannot be levied by Central Government on trading of goods because it has no authority of law to levy tax on a subject which is included in List II of Seventh Schedule of the Constitution of India.

However, Tribunal has held that trading of goods cannot be considered as a service or an exempted service in relation to issues involving Cenvat credit on input services. In Orion Appliances Ltd. v. CST, Ahmedabad (2010) 5 TMI 85 (Cestat, Ahmedabad), it was held that since trading activity is nothing but purchase and sales and is covered sale tax law, it may not be appropriate to call it as a service. Therefore trading activity cannot be called a service and therefore it cannot be considered as an exempted service also. [Also see: Gulf Oil Corporation Ltd. v. CCE, Vapi (2012) 8 TMI 45 (Cestat, Ahmedabad); TFL Quinn India Pvt. Ltd. v. CCE, Hyderabad (2014) 1 TMI 1111 (Cestat, Bangalore)].

Scope of Taxable Services

As trading of goods has been included in the negative list of services, it implies that Cenvat Credit of tax paid on input services used in trading of goods shall not be available.

The definition of ‘service’ excludes –

(i) any activity that constitutes only a transfer in title of –

(a) goods, or

(b) immovable property

by way of sale, gift or in any other manner.

(ii) any transfer, delivery or supply or goods which is deemed to be sale in terms of Clause (29A) of Article 366 of Constitution of India.

The activities of a commission agent or a clearing or forwarding agent which includes a consignment agent who sells the goods on behalf of another person/principal for a commission will not be included in trading of goods. The services provided by commission agent or a clearing and forwarding agent are not in the nature of trading of goods. These are auxiliary services for effecting trading of goods. In terms of the provision of clause (1) of section 66F, reference to service does not include reference to a service used for providing such service. Moreover, the title in the goods never passes on to such agents to come within the ambit of trading of goods.

Forward contracts would be covered under trading of goods as these are contracts which involve transfer of title in goods on a future date at a pre-determined price. In commodity futures actual delivery of goods does not normally take place and the purchaser under futures contract normally offset all obligations or closes out by selling an equal quantity of goods of the same description under another contract for delivery on the same date. There are, therefore, two contracts of sale/purchase involved which would fall in the category of trading of goods.

However, auxiliary services relating to future contracts or commodity futures will not be covered in the negative list under trading of goods.

Transfer of title of goods is one of the essential conditions for a transaction to come under the ambit of trading of goods. However, the services supporting or ancillary to the trading of goods would not come under the Negative List.

Service Tax is not applicable when there is a right to use the goods given by X to Y in exchange for a consideration as it is transfer of right to use goods. This is specifically liable to VAT. There is no service involved in same.

In Ace Caldery’s Ltd. v. CCE, Bhopal 2012 (5) TMI 62 - CESTAT, NEW DELHI, pre-deposit was waived where purchase and sale of goods was involved. There are many cases where the brand name owners get goods manufactured by job workers with their brand name, purchase the goods from the job workers and sell the goods to the consumers at a higher price. No service tax is paid or demanded in such cases.

In Maliva Enterprises v. CCE 2012 (5) TMI 601 - CESTAT NEW DELHI, it was held that Service Tax is only on the taxable service provided but not on sale of goods as Service Tax not being a commodity taxation.

In Graphic Procede v. French Ministry of the Budget, Public Accounts and the Civil Service (2012) 37 STT 719 (ECJ), it was held that activities amounted to supply of goods up to extent they were limited to mere reproduction of documents on materials, where ownership had been transferred to customer; however, it amounted to ‘supply of services’ when it involved services such as advice and adapting, modifying and altering original according to customer’s wishes, which were prominent in relation to supply of goods and which constituted an aim in themselves for recipient.

In Welcome Trust Ltd. v. Commissioner of Custom & Excise (2013) 38 STT 33 (ECJ), it was held that investment activities consisting of acquisition and sale of shares and other securities with a view to maximizing dividend and capital yields are not provision of service. In Indian context securities are treated as ‘goods’ u/s 65B(25) and as such, the transactions in securities are sale or purchase of goods, which is outside the ambit of Service Tax.

In Sparekassernes Datacentre (SDC) v. Skatteministeriet (2013) 39 STT 110 (ECJ), it was held that carrying out stock exchange transactions by assessee for its members’ customers by purchasing or selling securities held in customers’ portfolios was not liable to service tax.