JUNE 11, 2008

By T Vivek, Addl Director, Vigilance & Enforcement Department, Govt of Andhra Pradesh

SOME controversies, it is said, never die. Cabs in Andhra Pradesh have gone off the streets protesting proposed levy of VAT on the alleged service they provided to various customers. The flash protest was called off with the assurance of the government that the Commercial Taxes Department will not take any coercive steps to collect the VAT and after the government announced setting up a committee to go into the controversy.

The current controversy over VAT on cabs has its origins in the taxability of leasing transactions. Ever since the 46 th constitutional amendment and subsequent amendments to local sales tax laws creating tax liability on the so-called leasing or hire transactions, there has never been a moment without litigation. For some time the question whether the very amendment was valid did the rounds until the Supreme Court ruled in affirmative. There quickly followed another bout of litigation over the situs of sale in a leasing transaction. Where does the sale take place – whether in the state in which the goods are located or the state where the right to use goods is transferred - was the question that was raised and eventually resolved. The courts have ruled that the state where the right is transferred is the appropriate state. The present controversy raises new issues which are not only tricky but also intractable.

The provocation for the cab owners to take to the streets arises from the notices issued by the Commercial taxes department proposing to levy VAT. The cab owners association alleges that the Vigilance and Enforcement department issued notices to a large number of travel agencies that have provided cab services to IT firms to ferry their employees on annual contract basis. They contend 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 stand point they argue that when once some activity is recognized as service it could not once again treated as sale of goods and hence the proposed levy of VAT was unjust. This argument seemingly rational and logical, however, calls for careful consideration in the light of new and landmark decisions of courts of law rendered in recent times.

To capture the essence of the controversy and to appreciate the implications of the latest judicial decisions on the taxability of hire transactions, it is necessary to elucidate the constitution amendment referred above. The amendment authorized the states to tax certain transactions that are not strictly sales of goods but a mix of goods and services. The amendment enabled the states to separate goods from services and authorized levy of tax on goods. Various works contracts serve as apt examples of this category of transactions in which the goods part is severed for purposes of sales tax. Likewise in a leasing or hire transaction the sales tax law could levy tax on the transfer of the right to use goods. The ‘right' here is an abstract and intangible variety of goods. According to sales tax law goods of both tangible and intangible variety of goods are taxable. Therefore the intangible goods namely the ‘right' when transferred to a lessee became liable to tax and the transfer of the ‘right' amounted to sale. Thus the two essential ingredients of ‘goods' and ‘sale' are present in a leasing transaction. As these transactions are like sale of goods, they are known as ‘deemed sales'.

However, the levy of tax on ‘deemed sale' transactions is not free from potential problems of litigation. Every seemingly hire transaction may not really be a lease transaction. In order to distinguish true lease transactions from mere hire transactions one is guided by the principles laid down by the courts of law. The AP High Court in Rashtriaya Ispat Nigam (Vishaka steel) case dwelt at length on the issues involved in leasing and hire and drew distinction between custody and possession. The court observed that a mere right to use goods would not be a case of leasing without the freedom to exploit the goods to the exclusion of the lessor. Therefore, in a given lease or hire transaction it must be seen whether the lessee has freedom to use the goods as if they were his own. Mere right to use goods on the other hand would be licence but not lease. These principles must be applied to understand the present controversy. Facts of each case must be gone into to determine the applicability of the existing law and the principles laid by the courts. It serves no purpose if every travel agency is presumed to be leasing vehicles and the agencies are treated as lessors because the terms of contract may be different in each case.

The tax department seems to have built-up its case on the basis of certain court decisions. Mention may be made of the decision of Kerala High Court in Eastern Shipping Corporation where it was held that the tug which was at all times at the disposal of the chatterer was a case of absolute control over the goods (tug) and therefore the lessee had the freedom to use the goods to derive benefit out of the use and it was not mere licence. Likewise in a Determination Order the Commissioner VAT, Delhi opined that when a travel house provided cabs along with the driver it could not be a case of mere hire because the lessee had the right to use the goods to the exclusion of the owner of the cab. The argument of the travel house that payment of service tax should preclude levy of sales tax was rejected.

It may also be useful to refer to yet another decision of Kerala High Court which was followed by the Punjab and Haryana High Court in a case where the question whether sales tax could be levied on a transaction on which service tax was already levied. In this case examining the question whether SIM Cards were goods and whether service tax paid on them would prevent levy of sales tax, the court observed that a transaction which has many facets and one or more legislatures make laws, the respective legislatures are free to tax each facet of the transaction according to their respective legislative competence. This approach known as ‘DOCTRINE OF ASPECT LEGISLATION' permits levy of tax on facets of a given transaction under more than one law. Thus SIM cards were held as goods and their use for accessing the service provider for receiving signals could be taxed both under service tax and under sales tax. Viewed in the context of this decision there is a greater plausibility to levy VAT on a transaction that has already suffered service tax.

On the flip side this case brings into sharp focus yet another issue - how does one distinguish between goods and services. 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. It calls for greater prudence and ingenuity in the days to come to see where service ends and goods begin or vice versa. So the next time you hire a cab ask yourself whether you are paying for the lease or for service or for both. You are likely to come to a conclusion that much can be said on both sides. Some controversies, therefore, never die!