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Nut Crackers |
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Questions & Answers Indirect Taxes C. B. Thakar |
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Q.1 A dealer is executing works contract. In relation to service portion in the said contract, the service tax is charged separately. Whether such separate collection of service tax will be covered as part of sale price and whether it will be exigible to levy of VAT ? Ans. If service tax is charged separately in the invoice then the position will be required to be seen as per legal position laid down by High Court / Supreme Court in various judgments. Reference may be made to following judgments. M/s. Anandswarup Maheshkumar (46 STC 477) In above judgment after observing about provisions of U.P. Krishi Utpadan Mandali Adhiniyam, 1964 Supreme Court observed as under about nature of tax collection, whether part of sale price or not. (Page -483) “........From the observations made in the decisions referred to above, it follows that where a dealer is authorized by law to pass on any tax payable by him on the transaction of sale to the purchaser, such tax does not form part of the consideration for purposes of levy of tax on sales or purchases but where there is no statutory provision authorizing the dealer to pass on the tax to the purchaser, such tax does form part of the consideration when he includes it in the price and realizes the same from the purchaser. The essential factor which distinguishes the former class of cases from the latter class is the existence of a statutory provision authorizing a dealer to recover the tax payable on the transaction of sale from the purchaser.....” Bata India Limited vs. The State of Maharashtra (53 STC 132)(Bom). The case was under BST Act, 1959 and issue was whether BST collected separately is part of sale price or not. Bombay High Court relied upon above Supreme Court judgment to decide nature of collection. Bombay High Court, therefore, tried to find out whether there is authorization for collection of tax under BST Act, 1959. Though, there are no speaking provisions for authorization, based on other provisions in the BST Act, 1959, High Court observed that impliedly there is authorization to collect the tax under BST Act, 1959. In this respect, High Court made reference to provisions like forfeiture of excess collection of tax, as well as penalty and prosecution provisions and provision for deduction of tax element when tax is not collected separately. Thereafter applying principles laid down in above judgment of Supreme Court, High Court observed as under. “Thus it is clear that under the Bombay Act, the dealer is authorized to pass onto his purchaser the tax which he is liable to pay to the Government. Undoubtedly he can only do so with the consent of his purchaser. But this is or must be deemed to be by reason of a separate agreement express or implied with the purchaser, namely, that in addition to the price he will also pay to the dealer the amount of tax which he becomes liable to pay to the Government. Such separate agreement is shown when the bill or the invoice shows the amount of tax separately. It is, however, optional for the dealer to collect or not to collect the amount of tax from his purchaser. When he does not collect it, he bears the tax liability himself and does not reimburse himself in respect thereof. Even if he fixes his sale price by taking into consideration, the amount of tax which he would have to pay by charging a lump sum price and not showing separately the amount collected by way of tax, such lumpsum price would be the price of the goods because it would be impossible to determine whether or not the dealer had taken into account the amount of tax which he would have to pay”. Thus, Bombay High Court ruled that where there is separate collection of tax, the same will not be part of sale price. The above judgment of Supreme Court in Anand Swarup Mahesh Kumars was further referred to by Supreme Court with approval in case of Central Wines vs. Special Commercial Tax Officer (and other appeals) (65 STC 48)(SC). On page 55 Supreme Court observed as under. “It was further argued by learned counsel for the appellants drawing inspiration from Anand Swarup Mahesh Kumar vs. Commissioner of Sales Tax [1980] 46 STC 477 (SC); (1980) 4 SCC 451 that the matter requires reconsideration in the light of the observations made therein. We are unable to accede to this submission. In Anand Swarup Mahesh Kumar’s case [1980] 46 STC 477 (SC); [1980] 4 SCC 451 this court was concerned with the “market fee” collected by a dealer from the purchaser for being passed onto the market committee under U.P. Act No. 25 of 1964. It was an amount which the statute authorized the dealer to collect from the purchaser separately and directly under the authority of section 17(iii)(b)(1) of the said Act and to pass it on or make it over to the market committee. It is evident that it was an amount collected by the dealer under the statutory authority as an agent of the market committee for being passed on to the management committee and therefore could not be treated as a component of the sale price of the goods which were sold to the purchaser. It was in this context that this court came to the conclusion that the market fee so collected could not be included in the turnover as is evident from the pertinent passage:” If, the principles laid down in above judgments are applied to the service tax collected separately, we opine that separate collection of above tax will not be part of sale price. Under Service Tax Act, though there is no speaking provision authorizing collection of tax, impliedly there is authorization. If we look at the similar provisions, as done by Bombay High Court in above judgment of Bata India Ltd. vs. The State of Maharashtra (53 STC 132)(Bom), it is clear that there is authority for collection of service tax. Under Service Tax Act, there is prohibitory sections like section 73B, which says that the excess collection should be paid into the government treasury with interest. Similarly, there is section 67(2) which grants deduction for service tax element, when service tax is not charged separately. Thus, the position is similar as was in case of Bata India. In light of the above, it can be ascertained that there is authorization to collect service tax under Service Tax Act. The collection is on behalf of the government to be paid to the government. Therefore, the result is that the tax so collected separately will not be part of sale price. Accordingly, we opine that if service tax is collected separately on works contract then such collection will not be liable to VAT. Q.2 The dealer is a pharmaceutical (medicine) manufacturer. As per his policy, while selling goods to his distributors, he gives some quantity free and shows the same separately on sale invoice. Whether any VAT is payable in relation to such free supplies? The Sales Tax authorities are contemplating to add value of free issues for arriving at taxable sale price of actual quantity sold ? Ans. The opinion is to be based on provisions of sales tax laws. Generally ‘sale’ is defined uniformly under Sales Tax Laws. For example, under Maharashtra Value Added Tax Act, 2002 (MVAT Act, 2002) 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 (74 of 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; The said term has also been interpreted by Hon’ble Supreme Court of India in various judgments. Reference can be made to the landmark judgment of Supreme Court in case of Gannon Dunkerly and Co. (9 STC 353) (SC). In this case Hon’ble Supreme Court has interpreted the term ‘sale’ and has held that the transaction to be a sale, it should fulfill the minimum criteria as laid down in Sale of Goods Act. In fact Hon’ble Supreme Court has observed as under in relation to transaction of sale. “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 …...” From above passage it is clear that to be a ‘sale’ following criteria should be fulfilled. (i) There should be two parties
to contract i.e. seller/purchaser, It can be seen that the sale takes place against consideration. Since sale is a contract between seller and buyer the consideration is also decided by the terms of such contract. The seller is entitled to sell his goods at the price he thinks proper. The querist dealer is selling certain quantities and at the same time giving some quantities as free issues. The situation can be seen from three angles. 1. Against free issues dealer is not getting any consideration from the buyer. Therefore to the extent of such free issues no sale transaction is taking place. This is clear from Supreme Court judgment referred to above. The criterion about consideration is not fulfilled in relation to quantity issued free. When there is no consideration, there is no sale. Thus, there being no sale there is no question of any liability under Sales Tax Law. 2. The situation can be seen from other angle. The sale takes place against consideration and consideration is referred to as sale price. The term ‘sale price’ is defined in section 2(25) of the MVAT Act, 2002 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. Explanation 1. —The amount of duties levied or leviable on goods under the Central Excise Act, 1944 or the Customs Act, 1962 or the Bombay Prohibition Act, 1949, shall be deemed to be part of the sale price of such goods, whether such duties are paid or payable by or on behalf of the seller or the purchaser or any other person. Explanation II. — Sale price shall not include tax paid or payable to a seller in respect of such sale. Explanation III. — Sale price shall include the amount received by the seller by way of deposit, whether refundable or not, which has been received whether by way of a separate agreement or not, in connection with or incidental or ancillary to, the said sale of goods; Explanation IV: The amount of valuable consideration paid or payable of a dealer for the sale of Drugs specified in entry 29 in Schedule C shall be the maximum retail price printed on the package containing the Drug. (The above explanation IV is deleted by Maharashtra Ordinance No. V of 2007 Dt. 30-6-2007).” From above definition it is clear that the amount received from the buyer is the sale price and that is the taxable quantum. Dealer is billing for the quantities sold and on the same, tax is levied on the relevant value. Along with quantities sold certain quantities are given free. There is no sale in respect of such quantities as discussed above. In the alternative, it can be said that the value of above free supplies is merged in the value of actual quantity sold. In other words value of actual goods sold will include the value of free supplies and no further addition on account of free issues can be made. The tax is payable in respect of actual quantity sold. In spite of above, the value of free issues is considered for levy of tax it will amount to levy of tax in respect of price which is not received, nor receivable. In other words, it will amount to levy of tax on hypothetical value. This is not permitted under the Law. For legal position on above aspects reference can be made to the judgment of Supreme Court in case of Rajasthan Chemists Association (147 STC 542). In this case the Rajasthan Sales Tax Law contemplated to levy tax on MRP of the goods though the goods were sold at less than MRP. Supreme Court held that the tax cannot be levied on price more than the actual price received from the buyer. The levy of tax on MRP value was held as unconstitutional by the Supreme Court. The relevant observations of the Supreme Court are as under. “30. The question of tax on sale of goods may be examined in the said back-ground. The subject of tax being sale, measure of tax for the purpose of quantification must retain nexus with “sale” which is subject of tax. As noticed above, tax on sale of goods, is tax on vendor in respect of his sales and is substantially a tax on sale price. The vendor or buyer cannot be taxed de hors the subject of tax that is sale by the vendor or purchase by the buyer. The four essential ingredients of any transaction of sale of goods include the price of the goods sold, therefore, in any taxing event of sale, which become subject-matter of tax price component of such sale, is an essential part of the taxing event. Therefore, the question does arise whether a particular taxing event of sale could be subjected to tax at the prescribed rate to be measured with such price which is not the component of the transaction of sale, which has attracted the sales tax”. Supreme Court further held as under: 43. These cases give a clear picture that entry 54 in List II of the Seventh Schedule empowers the State Legislature to impose and collect taxes on sale of goods. The measure to which tax rate is to be applied must have a nexus to taxable event of sale and not divorced from it”. Supreme Court finally held as under: 52. Applying the principles enunciated above, the inevitable conclusion is that when the wholesaler sells any formulation to a retailer in bulk quantity, taxable event of sale of goods takes place where wholesaler and retailers are the parties to contract, the goods in question are the formulations and the consideration is one which is agreed to between the parties to that transaction within the limits permissible by law. By substituting the assumed quantity of goods or a price which is not subject-matter of that contract of completed sale for the purpose of measuring tax the Legislature assumes existence of contract of sale of drugs by legal fiction which has not taken place and which cannot be considered to be a sale in the manner stated in the Sales Act, which alone can be subject of tax under entry 54 in List II. Substitution of assumed price or the assumed quantity in place of actual price/quantity in a completed sale transaction, for the purpose of levy of tax on the subject-matter of tax results in taking away from it the character of “sale of goods” as envisaged under the Sales Act.” (underlining ours) In light of above tax has to be restricted on the value of actual goods sold. It cannot cover the goods which are not sold, that is, given as free issues. Adding value of free issues in taxable quantum will amount to levy tax on hypothetical value which is not permitted under Law. 3. The third angle is that the quantity given free can be considered to be discount. It is discount in kind. However, the same is permissible deduction from turn over. The discount is shown on sale bill and hence allowable as deduction from turnover. The effect is that even if value relating to said free issues is considered to be part of turnover initially, it should be considered as deduction from turnover as discount. Ultimately, the result is that no tax is payable on such free issues. The legal position though clear, reference can also be made to the judgment of Allahabad High Court in case of Dey’s Medical Stores Limited vs. Commissioner, Trade Tax, U.P. (and another case) (134 STC 14) where from the similar position is clear. The following para of the judgment makes the position clear. “8. The book version of the applicants has already been accepted. It was contented that two bottles were given on the purchase of 10 bottles of a commodity under the directive of the head office to all the purchasers which is also reflected in the invoices. This provision has been interpreted in various rulings. In the case of Shri Baidya Nath Ayurved Bhawan (P.) Ltd. vs. Commissioner of Sales Tax, U.P. [1970] 26 STC 171 (All.), it has been held by the Division Bench of this Court that “Under clause (ii) of the second explanation to section 2(i) of the U.P. Sales Tax Act, 1948, a deductible discount can be in cash or in kind, provided it is allowed on the sale price. The provision does not require the discount to be paid immediately the price is paid. The provision also does not concern itself either with the motive which impels a dealer to pay a discount or the manner and method of payment adopted by him. It is thus, immaterial whether a dealer pays something to a customer as an inducement for the prompt payment of the sale price or with a view to push up his own sales or with a view to get the better of his competitors in the trade. The only condition before a payment can be excluded from the turnover is that it should be a payment in cash or kind and that it must be allowed on the price of any sale.” (underlining ours) In light of above legal position, we opine that no tax is payable on free issues. |