JANUARY 17, 2012

By TIOL Team

THREE and a half years ago, precisely on June 11, 2008, we carried an article Goods or Service? VAT a Question!  by Mr. T. Vivek, Additional Director in the Vigilance and Enforcement Department of Andhra Pradesh Government.

The controversy, then was about cabs in Andhra Pradesh going on strike against the proposed VAT on cabs. The cab owners pleaded that they are into service, recognized as such by the Service Tax department, and that the activity is taxed under the Service Tax Act and taxes are accordingly paid to that department. From this standpoint, they argued that  when once some activity is recognized as service it could not once again be treated as sale of goods and hence the proposed levy of VAT was unjust.

The State Government official had stated, “In the context of modern technology innovations, the line that divided goods and services hitherto seems no longer valid as  both goods and services are increasingly converging to coalesce into one as happened in the case of SIM Cards and Software”.

The AP State Government had in a meeting with the Cabs Associations on 6.6.2008, assured that:

1.VAT will not be levied/ applied with retrospective effect.

2.No coercive action will be taken against the demands already raised.

3.A committee will be formed to look into the applicability of VAT on the business transactions and come out with clear-cut guidelines. If VAT is found applicable by the committee, it will be effective with prospective date to be notified.

But the Government, by an Ordinance No. 7 of 2011 dated September 14 2011 levied the tax with retrospective effect from 1.4.2005. This time, before the cabs could go off the roads, Government has decided as a special case to waive the tax up to November 7 2011. The Government Memo dated 11.11.2011 states,

"Government has however noted that an element of doubt existed among the taxi cab/ bus owners about the taxability of the transaction involving transfer of right to use the vehicles in view of differing Court decisions on the issue. Hence keeping in view all the attendant circumstances and legal position on the issue Government have decided, as a special case, to waive the VAT demand on transactions involving transfer of right to use taxi cabs/ buses upto 7 th November, 2011 provided the vehicle owner has paid Service Tax to the Union Government and has not collected VAT from the customer (lessee/ hirer of the vehicle). However VAT should be levied and collected on all such transactions with prospective effect from 08-11-2011. Cases in which VAT dues have been already paid shall not however be reopened nor the taxes refunded."

So, from 08.11.2011, the cab owners have to pay both Service Tax and VAT. The State Government draws strength from a decision of the AP High Court in M/s. G.S. Lamba & Sons Vs. State of Andhra Pradesh [2012-TIOL-49-HC-AP-CT ], which held that levy of VAT on a transaction involving the transfer of right to use Vehicles through a contract is valid.

In that case, the petitioners hired their fleet of Transit Mixers to M/s. Grasim Industries Ltd, which manufactured Ready Mix Concrete (RMC), according to the specifications depending on the site requirements of a customer. The petitioners provided transportation service for shipping RMC by hiring specially designed Transit Mixers. Under the contracts, the Transit Mixers are never transferred and the effective control over running and using of these vehicles, as well as the disciplinary control over the drivers, always remained with the petitioners. They point out that it is their responsibility to obtain route permits, to take the risk or loss of transportation, to decide shifts for drivers and vehicles, to maintain and upkeep the vehicles in good condition. It is also their plea that damages to the goods, during the period of transportation, and the risk of loss of the vehicles have to be incurred by the petitioners, and that registration of the vehicles is never transferred to Grasim.

And the High Court upheld the State Government's levy of VAT on this activity.

Now, what is the difference between service and sale? Can the same activity be both service and sale and be liable to both Service Tax and VAT?

While too many judicial decisions are floating around, compounding the confusion, a couple of decisions are worth a look.

In Bharti Airtel Ltd V State of Karnataka – 2011-TIOL-518-HC-KAR-ST the Karnataka High Court held, “To levy tax on the same aspect under both the legislation is impermissible. Though the service providers have taken a consistent stand throughout, that the contract in question is an indivisible contract and not a composite contract, it is the State which has taken inconsistent stand. It contends, in one breadth that the agreement is a composite contract but in another breadth, they contend it is an indivisible contract of sale simplicitor. The service providers categorically contend that, even if it is a composite contract and indivisible, as it does not fall under Article 366 (29-A) the State Legislatures have no competence to levy tax. Therefore, the question is if it is a composite contract, what is the dominant nature of the contract. In so far as testing the dominant nature of the contract the law is well settled .”

The High Court went on to impose costs and observed, “The way, the State and its authorities have ignored, disobeyed, by-passed a binding judgment of the Supreme Court and if permitted and remains unchecked, it will lead to a total disintegration of the system in which we are working. It will lead to total lawlessness and uncertainty. However, as this matter will not end here and it will be agitated before the Supreme Court, we leave it to the Hon'ble Supreme Court to take appropriate action against the State and its officials in order to prevent reoccurrence of such mis -adventures. However, the State has to pay costs to these petitioners for all the turmoil they have undergone. The State shall pay Rs.1,00,000 /- to each of the petitioners/appellants. ”

As noted by the High Court, the State Government took the matter to the Supreme Court, where it is pending, though the Supreme Court has stayed the award of costs.

The binding judgement of the Supreme Court which the High Court was referring to was BSNL Vs. Union of India & Ors (2006-TIOL-15-SC-CT-LB) .

In M/s SAYAJI HOTELS LTD Vs CCE, INDORE - 2011-TIOL-226-CESTAT-DEL , the CESTAT held that there was no sale involved in the Appellant's transaction as Mandap keeper while serving their customers, for there is no sale of food and beverage as defined in Section 2 (h) of the Central Excise Act, 1944.

In this case, the appellant WAS paying Sales Tax/VAT on the value of food sold!

In Aggarwal Colour Advance Photo System vs Commissioner of Central Excise - 2011-TIOL-1208-CESTAT-DEL-LB , the Larger Bench of the Tribunal held, " For the purpose of Section 67 of the Finance Act, 1994, the value of service in relation to photography would be the gross amount charged including cost of goods and material used and consumed in the course of rendering such service."

Now, when you hire a cab, are you paying for the service of using a cab or for the deemed sale of the cab to you temporarily and are you liable to pay Service Tax or VAT or both?

When and who will solve this riddle?