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TMI Blog2011 (2) TMI 1311X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, respectively. Aggrieved thereby, the petitioner preferred an appeal to the Appellate Deputy Commissioner (CT) who, by order dated May 7, 2008, partly allowed, partly remanded and partly dismissed the appeal. In so far as the first respondent had levied VAT on rental charges of lease equipment, the Appellate Deputy Commissioner, while observing that a perusal of the related bills/vouchers of the audio-visual equipment did not point to the transfer of the right to use goods as such, but on the contrary pointed to the fact that effective control and possession of the equipment/decoration, etc., rested with the suppliers, held that this aspect needed a thorough verification with the evidence available with the petitioner. The assessment order was set aside, and the matter was remanded back to the assessing authority directing him to redo the assessment in accordance with law. The first respondent, thereafter, issued notice dated January 8, 2010. The petitioner filed their objections thereto on March 31, 2010. The first respondent, by order dated April 8, 2010, levied tax on the rental charges for lease of equipment holding that the petitioner was liable to tax under section 4(8) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e right to use audio-visual equipment; and, therefore, section 4(8) of the Act is not attracted. The learned counsel would submit that the services rendered by the petitioner, i.e., of providing facilities to their customers in the form of audio-visual equipment, is as a "mandap keeper" which is a taxable service within the ambit of the Finance Act, 1994; while the supplier had billed the petitioner, the customers were billed by the petitioner; it was a case where services were rendered by the supplier to the petitioner and, in turn, by the petitioner to their customers; the supplier had charged service tax on their bills; the petitioner had also charged service tax on their customers; since the petitioner is paying service tax, they are not liable to pay sales tax on the very same transaction; and the assessing authority had exceeded his jurisdiction in levying tax, on what is essentially a transaction of service, on the erroneous premise that it is a transaction involving transfer of the right to use the audio-visual equipment; as the petitioner had paid service tax on the consideration received for providing audio-visual equipment, parallel levy of VAT on the same turnover was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 126 (SC); [2007] 7 SCC 527. On the other hand, Sri A.V. Krishna Koundinya, the learned Standing Counsel for Commercial Taxes, would submit that "dominant intention" is no longer the applicable test; in a composite contract, sales tax can be levied to the extent it relates to the transfer of the right to use goods; burden is on the petitioner to establish that they continued to retain effective control and possession of the audio-visual equipment even during its usage; the appellate authority had held that the aspect, whether or not there was a transfer of the right to use the audio-visual equipment, needed a thorough verification with the evidence available with the petitioner; as such the matter was remitted back to the assessing authority; and the assessing authority was, therefore, justified in examining the transactions in question, and in arriving at an independent conclusion that there was a transfer of the right to use the audio-visual equipment. The learned standing counsel would rely on Bharat Sanchar Nigam Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 282 ITR 273 (SC); [2006] 3 SCC 1, Tata Consultancy Services v. State of Andhra Pradesh [2004] 137 STC 620 (SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e based services are services provided by service providers like stockbrokers, practising chartered accountants, practising cost accountants, security agencies, tour operators, event managers, travel agents, etc. (All India Federation of Tax Practitioners [2007] 9 VST 126 (SC); [2007] 7 SCC 527). The provisions relating to "service tax" in the Finance Act, 1994, make it clear, under section 64(3), that the Act applies only to taxable services. Taxable services have been defined in section 65(105). Each of the clauses of that sub-section refers to different kinds of services provided. The rate of service tax has been fixed under section 66. Under section 65(66), "mandap" is defined to mean any immovable property, as defined in section 3 of the Transfer of Property Act, 1882, and to include any furniture, fixtures, light fittings and floor coverings therein let out for consideration for organizing any official, social or business function. Under the Explanation thereto, social function includes a marriage. Section 65(67) defines "mandap keeper" to mean a person who allows temporary occupation of a mandap for a consideration for organizing any official, social or business function. Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the amount of service tax calculated on 60 per cent of the gross amount charged from the client by the mandapam-keeper, for the use of the mandapam including the facilities provided to the clients in relation to such use, and also for certain charges. The said notification also provided that the exemption shall apply only in such cases where the mandapamkeepers also provide catering services, i.e., supply of food and drinks, and the bill issued for this purpose indicates that it is inclusive of charges for catering services. The said notification came into force on July 1, 1997. The subject-matter of tax under the provisions of the Finance Act, 1994, is not the "sale of goods" but "service". It may be that both the levies are to be measured on the same basis, but that does not make the levy the same. (Gujarat Ambuja Cements Ltd. [2005] 1 VST 1 (SC); [2005] 274 ITR 194 (SC); [2005] 4 SCC 214). The nature and character of the levy of the service tax is distinct from a tax on the sale or hire-purchase of goods. (Tamil Nadu Kalyana Mandapam Assn. [2005] 1 VST 180 (SC); [2004] 135 STC 480 (SC); [2004] 217 ITR 9 (SC); [2004] 5 SCC 632. Before examining the rival contentions, we sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 (SC); [1989] 2 SCC 645). Article 366(29A), as introduced by the Forty-sixth Amendment, not being equivalent to a separate entry in List II is subject to the same discipline/limitations as entry 54 of that List. (Bharat Sanchar Nigam Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 282 ITR 273 (SC); [2006] 3 SCC 1, Builders Association of India [1989] 73 STC 370 (SC); [1989] 2 SCC 645, Gannon Dunkerley & Co. [1993] 88 STC 204 (SC); [1993] 1 SCC 364). The Forty-sixth Amendment introduced a fiction by which six instances of transactions were treated as deemed sale of goods. (Bharat Sanchar Nigam Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 282 ITR 273 (SC); [2006] 3 SCC 1). When the law creates a legal fiction, such fiction should be carried to its logical end. If the power to tax a sale, in an ordinary sense, is subject to certain conditions and restrictions imposed by the Constitution, the power to tax a transaction which is deemed to be a sale under article 366(29A) of the Constitution should also be subject to the same restrictions and conditions. (Builders Association of India [1989] 73 STC 370 (SC); [1989] 2 SCC 645). The said definition, as to deemed sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s may, however, be effected by delivery of the goods. (20th Century Finance Corpn. Ltd. v. State of Maharashtra [2009] 119 STC 182 (SC); [2000] 6 SCC 12). The State is, however, not competent to levy sales tax on the transfer of the right to use goods, which is a deemed sale, if such sale takes place outside the State or is a sale in the course of inter-State trade or commerce or is a sale in the course of import or export. The transaction, of a transfer of the right to use goods, cannot be termed as a contract of bailment as it is a deemed sale within the meaning of the legal fiction engrafted in clause (29A)(d) of article 366 of the Constitution wherein the location, or the delivery, of the goods to be put to use is immaterial. (20th Century Finance Corpn. Ltd. [2009] 119 STC 182 (SC); [2000] 6 SCC 12). Location or delivery of goods within the State cannot be made the basis for levy of tax on the sale of goods. Delivery of goods may be one of the elements of transfer of the right to use, but would not be a condition precedent for a contract of transfer of the right to use goods. Where a party has entered into a formal contract, and the goods are available for delivery irrespect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ); [2006] 145 STC 91 (SC); [2006] 282 ITR 273 (SC) ; [2006] 3 SCC 1 and Imagic Creative Pvt. Ltd. [2008] 12 VST 371 (SC); [2008] 2 SCC 614. Dominant intention test In Rainbow Colour Lab v. State of Madhya Pradesh [2000] 118 STC 9 (SC); [2000] 2 SCC 385, the Supreme Court held that division of a contract can be made only if the contract involved a dominant intention to transfer the property in goods, and not in contracts where the transfer in property takes place as an incident of a contract of service; the Forty-sixth Amendment does not empower the State to indulge in a microscopic division of contracts involving the value of material used incidentally in such contracts; what is pertinent to ascertain is what was the dominant intention of the contract; every contract, be it a service contract or otherwise, may involve the use of some material or the other in execution of the said contract; the State is not empowered to impose sales tax on such incidental material used in such a contract unless there is a sale and purchase of goods (either in fact or deemed), and which sale is primarily intended and not incidental to the contract; and the State cannot impose sales tax on a contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the observations in Associated Cement Companies Ltd. [2001] 124 STC 59 (SC); AIR 2001 SC 862 were merely obiter, and Rainbow Colour Lab [2000] 118 STC 9 (SC); [2000] 2 SCC 385 was still good law, was not correct. The dominant nature test may, however, be applied to a composite transaction not covered by article 366(29A). If there is an instrument of contract which may be composite in form, in any case other than the exceptions in article 366(29A), unless the transaction in truth represented two distinct and separate contracts, and was discernible as such, the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test, therefore, for composite contracts, other than those mentioned in clauses (a) to (f) of 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 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 as to what is "the substance of the contract", i.e., the dominant nature test. (Bharat Sanchar Nig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract and the cost of establishment which is relatable to supply of material involved in the execution of the works contract only can be included in the value of the goods'." (emphasis Here Italicised. supplied) The distinction between an indivisible contract and a composite contract must be borne in mind. If a contract contains an element of service the object for which clause (29A) was inserted in article 366 of the Constitution of India must be kept in mind. Service tax and VAT are mutually exclusive. They should be held to be applicable having regard to the respective parameters of "service" and "sale" as envisaged in a composite contract as contra-distinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. (Imagic Creative Pvt. Ltd. [2008] 12 VST 371 (SC); [2008] 2 SCC 614). The principles governing "transfer of the right to use goods", to the extent relevant, were summed up in G.S. Lamba & Sons, represented by Gurusharan Singh Lamba v. State of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identity of the good is shown the transaction is exigible to tax. (i) The locus of the deemed sale, by transfer of the right to use goods, is the place where the relevant right to use goods is transferred. The place where the goods are situated or where the goods are delivered or used is not relevant." To the afore-extracted principles we may, to the extent relevant to the cases before us, add a few more: "(j) Tax leviable, by virtue of sub-clause (d) of clause (29A) of article 366 of the Constitution, is subject to the same discipline/limitation as is applicable to a law made under entry 54 of List II of the Seventh Schedule to the Constitution. (k) The fiction in article 366(29A) operates to deem what is not otherwise a sale of goods as a sale of goods, i.e., even the 'transfer of the right to use goods' is deemed to be a 'sale of goods'. (l) The earlier view that, once a taxable event is determined as a service rendered and not the sale of goods, the taxable event would occur because of the service rendered, is no longer applicable as, after the Forty-sixth Amendment to the Constitution, the sale element of contracts, which are covered by the six sub-clauses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able therein, they are not allowed to entrench upon the Union List and tax services by including the cost of such services in the value of goods. (u) Likewise while the Centre can levy service tax, on the service component of a transaction, it cannot tax intra-State sale of goods by including the value of the goods in the cost of such services. (v) Unlike an indivisible contract, service tax and VAT (which are mutually exclusive) can be levied in a composite contract having regard to the respective parameters of 'service' and 'sale'; (w) The 'aspect doctrine' relates only to legislative competence, and would not apply to enable the value of services to be included in the sale of goods or the price of goods to be included in the value of services. (x) The 'dominant intention test', whereby the State is empowered to divide a contract only if the contract involves a dominant intention to transfer the goods, and not in contracts where transfer of the goods takes place as an incident of a contract of service, falls foul of the express provisions of article 366(29A) of the Constitution of India and the judgment of the Supreme Court in Builders Associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the decision of the Karnataka High Court in Lakshmi Audio Visual [2001] 124 STC 426 (Karn), and the Division Bench judgment of this court in Rashtriya Ispat Nigam Ltd. [1990] 77 STC 182 (AP), to contend that they did not fall within the ambit of section 4(8) of the Act. In Rashtriya Ispat Nigam Ltd. [1990] 77 STC 182 (AP), a Division Bench of this court held that, in bailment, there is a transfer of goods for a particular period and, thereafter, the goods have to be returned to the person delivering them; one of the categories of bailment is hire of chattel; it is this category of bailment of goods that is the tax base under section 5E of the APGST Act (similar to section 4(8) of the Act); the taxable event under section 5E is the transfer of the right to use any goods; this meant that, unless there is a transfer of the right to use the goods, no occasion for levying tax arises; providing a facility which involves the use of goods nor even a right to use the goods is not enough; there must be a transfer of that right; the essence of transfer is the passage of control over the economic benefits of property which results in terminating rights and other relations in one entity and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the petitioner did not deliver any equipment to the customer, but took the equipment to the site of the programme, installed them, operated them and then dismantled them and brought them back after the period of hiring, possession and effective control never left the petitioner, and the customer never got the right to the use of equipment; and, in such an event, there was no deemed sale attracting tax. In the impugned order of assessment dated April 8, 2010, the assessing authority notes that the sample bill, produced as part of the objections, revealed that the petitioner-hotel was providing equipment to its customers on rental basis; this amounted to a "deemed sale" under Explanation (iv) to section 2(28) of the Act; the bill produced for verification did not reveal that technicians were provided along with the LCD projectors or audio/video equipment; consideration was charged exclusively for the equipment; effective control over the said goods had been transferred to the ultimate customer for use in their functions; the petitioner had given the LCD projectors and audio/video multimedia equipment on hire to their customers without rendering any other service, i.e., they mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operate the audio-visual equipment, and the A.V. equipment remained under the control and possession of the outsourcing agency during the customer's conference, the petitioner should have produced the agreement between them and the outsourcing agency and other documents in support thereof. No copy of any such agreement was placed either before the assessing authority or before this court. The assessing authority has recorded the finding that the audio visual equipment was delivered to the customer who paid rental charges for such equipment; the petitioner nowhere figured in the process of the customer putting the audio-visual equipment to use; and, during the period of the conference, it was the customer who was using the said audio-visual equipment. It is thus evident that effective control over the audio-visual equipment has been transferred to the customer who pays rental charges to the petitioner. The assessing authority was, therefore, justified in treating the said transaction as a transfer of the right to use goods, and levying tax thereupon under section 4(8) of the Act. The appellate authority had earlier held that the aspect, as to whether there was a transfer of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent to its being remanded by the appellate authority, was passed only on April 8, 2010; and, as the petitioner had already paid the tax due even during the pendency of the appeal filed earlier, the assessing authority was not justified in directing them to pay interest of Rs. 1,99,460. Under section 22(2) of the Act, if any dealer fails to pay tax within the time prescribed or specified therefor, he shall pay, in addition to the amount of such tax, interest calculated at the rate of one per cent per month for the period of delay from such prescribed or specified date for its payment. Rule 25(5) stipulates that the assessing authority shall assess the tax payable, and shall serve upon the dealer an order of the tax assessed in form VAT 305, and the VAT dealer shall pay the sum within the time and manner specified in the notice. Form VAT 305, which is the prescribed form for an order of assessment of VAT, stipulates that tax should be paid within 30 days from the date of receipt of the order of assessment, failing which the dealer shall be liable to pay interest for the period of delay. The provisions by which the authority is empowered to levy and collect interest, even if con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,52,770 was being confirmed. In the show-cause notice dated April 8, 2010 all that is stated is that the books of accounts of the petitioner was audited, and it was found that they had not declared the correct output tax in form VAT 200 filed by them during the period 2006-07 to 2007-08; therefore an order of assessment dated April 8, 2010 was passed for under-declaration of output tax; according to section 53(3), any dealer who has under-declared tax, and where it is established that fraud or wilful neglect has been committed, shall be liable to pay penalty equivalent to the tax declared; in view of section 53(3), it was proposed to levy penalty under section 53(3) of the Act of Rs. 6,52,770 which was equivalent to the under-declared output tax. Section 53(1) of the Act stipulates that, where any dealer has underdeclared tax and where it has not been established that fraud or wilful neglect has been committed, if the under-declared tax is (i) less than ten per cent of the tax, a penalty shall be imposed at ten per cent of such under-declared tax; and (ii) more than ten per cent of the tax due, a penalty shall be imposed at twenty five per cent of such under-declared tax. Under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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