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Q.1 X is land owner and Y is contractor. X has asked Y to construct
building consisting of 8 floors. X has agreed to allot 3 floors to Y for
performing above work. Whether Y is liable to works contract tax liability?
Ans. The main issue is
about liability, if any, as works contract in relation to construction of
building for X. The facts in above respect are clear. The concerned land belongs
to X. Y will be constructing building on X’s land using his building materials
etc.. There is thus transfer of property. In normal course this transaction
would have amounted to taxable works contract and liable to tax. However in this
case the situation is peculiar.
Y is constructing the building
using his materials. Against the said use and transfer of materials, Y is
getting three floors as consideration. To be a taxable sale transaction under
Sales Tax Laws it is necessary that the consideration is in money terms.
The legal position in this regard is discussed below for more elaboration.
Though generally is the
position in all Sales Tax Laws is similar, the discussion here is made in
relation to Maharashtra Valued Added Tax Act, 2002 (MVAT Act, 2002). The
transaction of ‘sale’ is liable to tax. The term ‘sale’ is defined as under in
section 2(24):
“(24) “sale” means a sale of
goods made within the State for cash or deferred payment or other valuable
consideration but does not include a mortgage, hypothecation, charge or
pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical
variations and cognate expressions, shall be construed accordingly;
Explanation,— For the
purposes of this clause,—
(a) a sale within the State
includes a sale determined to be inside the State in accordance with the
principles formulated in section 4 of the Central Sales Tax Act, 1956;
(b) (i) the transfer of property in any goods, otherwise than in pursuance of
a contract, for cash, deferred payment or other valuable consideration;
(ii) the transfer of property
in goods (whether as goods or in some other form) involved in the execution
of’ a works contract namely, an agreement for carrying out for cash, deferred
payment or other valuable consideration, the building, construction,
manufacture, processing, fabrication, erection, installation, fitting out,
improvement, modification, repair or commissioning of any movable or immovable
property.
(iii) a delivery of goods on hire-purchase or any system of payment by
instalments;
(iv) the transfer of the right to use any goods or any purpose (whether or not
for a specified period) for cash, deferred payment or other valuable
consideration;
(v) the supply of goods by any association or body of persons incorporated or
not, to a member thereof or other valuable consideration;
(vi) the supply, by way of or as part of any service or in any other manner
whatsoever, of goods, being food or any other article for human consumption or
any drink (whether or not intoxicating), where such supply or service is made
or given for cash, deferred payment or other valuable consideration:
(underlining ours)
Thus, the transaction to be a
sale, it should be a sale of goods for cash, deferred payment or other
valuable consideration. Unless money consideration is agreed upon, there is no
question of ‘sale’ as per Sales Tax Laws.
The situation can further be
scrutinized from the definition of ‘sale price’ in section 2(25) of MVAT Act,
2002, which reads as under.
“(25) “sale price” means the
amount of valuable consideration paid or payable to a dealer for any sale made
including any sum charged for anything done by the seller in respect of the
goods at the time of or before delivery thereof, other than the cost of
insurance for transit or of installation, when such cost is separately
charged.——
(underlining ours)
Thus it is the amount agreed
for transfer of property which is sale price and which can be subjected to
tax. Unless the valuable consideration is available in money terms no tax can
be calculated as the tax is always in % of the sale price.
The combined reading of above
two definitions amply shows that unless the transfer of goods to other party
is against money consideration there is no ‘sale’ transaction for the purpose
of MVAT Act and no tax can be levied on such transaction. Though above
position is clear from the above cited provisions, we can make reference to
some decided cases for further clarification.
M/s. Gannon Dunkerley & Co.
(9 STC 353)(SC)
Supreme Court while dealing
with the taxability of transaction of works contract under the sales tax laws,
observed about the ingredients of ‘sale’ as under on page 365 of 9 STC.
“Thus, according to the law
both of England and of India, in order to constitute a sale it is necessary
that there should be an agreement between the parties for the purpose of
transferring title to goods, which of course presupposes capacity to contract,
that it must be supported by money consideration, and that as a result of the
transaction property must actually pass in the goods ….. so also if the
consideration for the transfer was not money, but other valuable
consideration, it may then be exchange or barter but not a sale. And if under
the contract of sale, title to the goods has not passed, then there is an
agreement to sell and not a completed sale.”
Thus from above passage it is
clear that to be a ‘sale’ following criteria should be fulfilled.
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There should be two parties to contract i.e. seller/purchaser,
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The subject matter of sale is movable goods,
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There must be money consideration and
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Transfer of property; i.e., transfer of ownership from seller to purchaser.
Thus it is clear that there
should be consideration against the transfer of ownership in goods.
The consideration has to be
in money terms. If the consideration is not in money terms but in any other
mode it may be case of barter or exchange but not ‘sale’.
CIT vs. Motors & General
Stores (P) Ltd. (66 ITR 692)
In this respect reference can
be made to the Supreme Court judgment in case of CIT vs. Motors & General
Stores (P) Ltd. 66 ITR 692. In this case, Supreme Court has observed as under
on page 695/696 of 66 ITR:
“Section 54 of the Transfer
of Property Act defines ‘sale’ as a transfer of ownership in exchange for a
price paid or promised or part paid and part promised. Section 54 of the
Transfer of Property Act reads as follows:
“sale’ is a transfer of
ownership in exchange for a price paid or promised or part paid and part
promised”
There is no definition of the
words ‘price’ in this Act. But it is well settled that the word ‘price’ is
used in the same sense in this section as in section 4 of the Sales of Goods
Act, 1930 (Act III of 1930) (see the decisions of a full Bench of the Madras
High Court in Madam Pillai vs. Badrakali Ammal) Section 4 of the Sale of Goods
Act reads as follows:
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A contract of sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer for a price. There may
be a contract of sale between one part owner and another.
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A contract of sale may be absolute or conditional.
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Where under a contract of sale the property in the goods is transferred from
the seller to the buyer, the contract is called a sale, but where the
transfer of the property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, the contract is called
an agreement to sell.
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An agreement to sell becomes a sale, when the time elapses or the conditions
are fulfilled subject to which the property in the goods is to be
transferred.”
Section 2(10) of the Sale of
Goods Act defines ‘price’ as meaning the money consideration for a sale of
goods. The presence of money consideration is therefore an essential element
in a transaction of sale. If the consideration is not money but some other
valuable consideration it may be an exchange or barter but not a sale.”
(underlining ours).
M/s. Davi Dass Gopal Krishnan
and Others (22 STC 430 (SC)
In this case the issue arose
as to whether ‘other valuable consideration’ will include consideration other
than money. Hon’ble Supreme Court has observed as under on page 444/445:
“Bearing that in mind let us
look at clause (ff) in section 2 of the principal Act in which the said clause
was inserted. The ingredients of the definition of ‘purchase’ are as follows:
(i) there shall be acquisitions of goods; (ii) the acquisition shall be for
cash or deferred payment or other valuable consideration; (iii) the said
valuable consideration shall not be other than under a mortgage,
hypothecation, charge or pledge. Clause (h) of section 2 defines ‘sale’ thus:
‘sale’ means any transfer
of property in goods other than goods specified in Schedule C for cash or
deferred payment or other valuable consideration but does not include a
mortgage, hypothecation, charge or pledge.
If we turn to the Sale of
Goods Act, section 4 thereof defines a contract of sale of goods. It reads:
“A contract of sale of
goods is a contract whereby the seller transfers or agrees to transfer the
property in goods to the buyer for a price….”
The essential requisites of
sale are (i) there shall be a transfer of property or agreement to transfer
property by one party to another; and (ii) it shall been for consideration of
money payment or promise thereof by the buyer. …
Now, coming to the expression
‘price’, it is no doubt defined in the Sale of Goods as ‘money consideration’.
Cash or deferred payment in clause (ff) of section 2 of the Act satisfies the
said definition. The expression ‘valuable consideration’ has a wider
connotation, but the said expression is also used in the same collocation in
the definition of ‘sale’ in section 2(h) of the Act. The said expression must
bear the same meaning in clause (ff) and clause (h) of section 2 of the Act.
It may also be noticed that in most of the Sales Tax Acts the same three
expressions are used. It has never be argued or decided that the said
expression means other than monetary consideration. This consistent
legislative practices cannot be ignored. The expression ‘valuable
consideration’ takes colour from the preceding expression ‘cash or deferred
payment’. If so, it can only mean some other monetary payment in the nature of
cash or deferred payment. We, therefore, hold that clause (ff) of section 2 of
the Act is not void for legislative incompetence.”
(underlining ours)
Thus “other valuable
consideration” used in definition reproduced above will have the meaning as
consideration in money terms only and not any other consideration.
M/s. Radhas Printers vs.
State of Kerala (90 STC 201) (Kerala)
In this judgment also
applying the law laid down by Hon’ble Supreme Court in Devi Dass Gopal
Krishnan, the Kerala High Court has held as under on page 205/206:
“11. These decisions
therefore cannot be treated to hold that ‘other valuable consideration’ could
be goods or other property and that consideration need not be money
consideration. In the decisions in Sales Tax Commissioner vs. Ram Kumar
Agarwal (1967) 19 STC 400, the Allahabad High Court held that ‘other valuable
consideration’ which occurs in section 2(h) of the U.P. Sales Tax Act, 1948,
must be interpreted on the basis of the rule of ejusdem generis to mean
cheques, bills of exchange or such other negotiable instruments and that they
cannot cover a case where no price is paid. The Supreme Court in the decision
in Devi Dasss Gopal Krishnan vs. State of Punjab (1967) 20 STC 430 held that
the expression ‘valuable consideration’ takes colour from the preceding
expression cash or deferred payment. Thus to constitute ‘sale’ within the
meaning of the KDST Act, the same should be for consideration either in cash
or deferred payment, or other valuable consideration; and other valuable
consideration in the context must be interpreted to mean cheques, bills of
exchanges or any such negotiable instruments.”
(underlining ours)
Thus the legal position is
more than clear that unless the transfer of property by the seller to buyer is
against money consideration there cannot be ‘sale’ transaction for the
purposes of sale tax laws.
In case of X the
consideration is in form of constructed floors. Therefore the transaction
between Y and X is not a taxable Works Contract under Sales Tax Laws and no
liability as Works Contract is attracted.
Q.2 Whether Franchise
Agreement, where Trademark is allowed to be used by various Franchisee
simultaneously is transaction of service or lease of trademark? By Franchise
Agreement the Trade Mark holder allows the party to use their trade mark as well
as give certain services like, selection of premises, selection of raw
materials, quality control etc..
Ans. From above query it is
clear that the Trade mark holder is entering into Franchise Agreement with
various parties. It appears that as per Franchise agreement the trademark holder
will provide various services to the concerned Franchisee party like selection
of premises/ layout, selection of raw materials, manufacturing process, delivery
process etc.. Normally in Franchise Agreement the Franchisee is entitled to use
the trademark in the name on the premises as well as on packing boxes and other
related material like T Shirts of the delivery boys etc.. The issue arises as to
whether allowing use of trademark is lease of trademark or whether it is part of
service where by the whole transaction will be service transaction of Franchise.
The Maharashtra Sales Tax Tribunal had an occasion to deal with above issue in
case of Somkins Joe’s Pizza Pvt. Ltd. A 25 of 2004 dt. 25-11-2008. Tribunal in
above case referred to judgment in case of Dukes & Sons (112 STC 370)(B.H.C.).
In this case the Bombay High Court held the transaction of Franchise as lease
transaction of trademark. However though the facts in this case are similar,
Hon’ble Tribunal distinguished the same based on recent developments. Tribunal,
amongst others, referred to the judgment of Supreme Court in case of Bharat
Sanchar Nigam Ltd. (145 STC 91) wherein Supreme Court has laid down criteria for
deciding the nature of transaction as lease transaction. In particular Tribunal
referred to para 98 which states as under.
“98. To constitute a
transaction for the transfer of the right to use the goods the transaction must
have the following attributes:
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There must be goods available for delivery;
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There must be a consensus ad idem as to the identity of the goods;
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The transferee should have a legal right to use the goods – consequently all
legal consequences of such use including any permissions or licences required
therefore should be available to the transferee;
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For the period during which the transferee has such legal right, it has to be
the exclusion to the transferor – this is the necessary concomitant of the
plain language of the statute – viz. a “transfer of the right to use” and not
merely a licence to use the goods;
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Having transferred the right to use the goods during the period for which it
is to be transferred, the owner cannot again transfer the same rights to
others.”
In light of above Tribunal
observed that since there is no exclusive allowing of use to one party it cannot
be lease transaction. Tribunal also observed about various services to be
provided by the trademark holder and hence held that it is basically a service
transaction and not lease transaction. |