In Pursuit of Knowledge

Incorporeal or Intangible Nature of Goods
– Whether liable

P. C. Joshi
Advocate

1. Ever since the Supreme Court pronounced its judgment in the case of M/s H. Anraj on 4th October, 1985 (61 STC 65) in regard to the nature of transactions involving sale of lottery tickets, the State legislatures all over the country, either introduced the specific entries in the taxable Schedule or started levying tax under the residuary entry under the respective State enactments. The same position continued with the introduction of Value Added Tax (VAT) system by all the States in the country. However, the later development of law through two Constitution bench judgments, have reopened the question over again as to whether various nature of intellectual properties can at all be considered as goods of incorporeal or intangible character within the definition of the term ‘goods’ under Article 366(12) of the Constitution, as also the respective VAT Acts. My endeavour in this article is to recapitulate the earlier scenario following the Supreme Court judgment in the case of M/s H. Anraj and the resultant consequences flowing from the later two judgments.

2. Various transactions involving one or the other category of intellectual property that were brought under the tax net are:

   A. Patents
   B. Trade marks
   C. Import licences
   D. Software Packages
   E. Credit of DEPB
   F. Technical Know-how
   G. Goodwill
   H. Copyright
   I. Design
   J. SIM Cards used in Mobile Phones

3. There may be many more transactions of such nature in addition to the above transactions. However, by and large, the State enactments levied tax treating each of them as part of incorporeal or intangible goods liable to be taxed under Entry 54 of List II of the Seventh Schedule appended to the Constitution.

4. One of the major fall-out of globalisation is the multifold increase in the agreements involving some of the intellectual properties possessed by multi- national foreign companies or Indian companies vis-à-vis their agreements with entities in other nations.

5. It would, therefore, be beneficial for the readers to first consider the true nature of each of the above-mentioned intellectual properties agreed to be transferred across the borders. The same in nutshell are as under :

5.I Patent

A patent is a monopoly right granted to a person who has invented a new and useful article or an improvement of an existing article or a new process for making an article. It consists of an exclusive right to manufacture a new article invented by the person concerned. The patent holder can prevent any other person from using the patented invention.
The patent normally is granted in the work of art, process, method or manner of manufacture. According to section 3 of the Patents Act, 1970, mere discovery of a scientific principle is not patentable.
Similarly, method of agriculture or horticulture is also not patentable.

5.II Trade Mark

1. The Trade Mark Act, 1999 define the term ‘trade mark’ as a mark capable of being represented graphically which is capable of distinguishing the goods or services of one person from those of others. It may include shape of goods, their packaging and combination of colours. In other words, the registered trade mark is used in relation to goods or services for the purpose of indicating a connection in the course of trade, between goods or services and the person having the right to use the trade mark. The use of trade mark may be by the trade mark holder, registered user or a licensee of the trade mark holder.

2. Trade Mark is one type of intellectual property which does not exist by itself, but can be attached to goods kept for sale in the market. It is a beneficial, negative or protective interest in movable property, not in possession either actual or prospective. In other words, it is not a physical article, but only one kind of intellectual property that can be passed to the transferee as a part of or an incidental to the transfer of business, goods etc. Trade mark,therefore, is a representational right possessed by the trade mark holder which can be exercised only on infringement thereof by any third person.

3. As far as the ‘goods’ are concerned, trade mark is a distinctive mark attached to goods offered for sale in the market, so as to distinguish it from similar goods manufactured by others. Any infringement of the right possessed by the trade mark holder by any person can be legally prevented, so also an action for passing off, would be open as a legal remedy in common law.

5.III Import Licences

Import & Export (Control) Act, 1947 enabled the Central Government to issue an order prohibiting, restricting or otherwise controlling the import into and export out of the country, of any goods, that may be notified in the Government Gazette. That Act define ‘licence’ to mean a licence granted under any control order issued by the Central Government. The Import Control Order, 1955 contain the provisions relating to various categories of import licences. The policy of the Government in regard to the import or export control is periodically announced in the form of an EXIM policy valid normally for three years. Depending upon the Schedule under which the import licence may have been issued, It is either a compensatory one in the form of an incentive for export or helping the exporter by issuing the import licence of the value equivalent to or in proportion to the export out of the country. By now there are various types of import licences like Exim scrip, Special import Iicence, Duty free advance licence, DEPB, REP licence etc. All those types of licences confer a right on the holder thereof, which can be transferable freely under the EXIM policy. Such a transfer would be governed by the general law and need no endorsement. However, the transferee of such a licence get the right to import the goods specified therein.

Considering the licences in its true spirit and considering the pith and substance thereof, it can well be said that the licences and Exim scrips as well as other licences grant an incentive on the basis of their performance in foreign trade, by way of concession from custom duty. The levy of custom duty, however, is within the domain of the Central Government and no State legislature can provide for such a duty.

Similar is the position in regard to export permit quota or licence to export.

5.IV Credit of Duty and Entitlement Pass Book (DEPB)

DEPB was a part of EXIM policy during the period of a few years. The object of such a credit duty pass book was to neutralise the incident of basic custom duty on the import content of the export product. In other words, the credit of duty was granted against the export products by taking into account the value of deemed import content of the exported goods. Under the scheme, an exporter was entitled to claim credit of import duty at a special percentage of the gross value of exports made in freely convertible currency. The credit would be available at such rate as may be specified by the Director General of Foreign Trade. In case the DEPB credit was not adjusted against the payment of custom duty during the prescribed period, it lapsed and was not permitted to be withdrawn or adjusted in any other manner. However, the credit in question was transferable to any other person desiring the import on the basis of credit available in the hands of the exporter. Such transactions were freely traded, but did not involve any profit of any nature, because it was the transfer of credit in the pass book similar to the credit balance shown in the bank pass book.

5.V Software

Software, which are personalised software prepared or programmed for a specific customer, cannot be considered to be goods, because it is neither marketable nor useful to any other third person, but as far as branded softwares are concerned like tally, oracles etc., the same can be termed as taxable in view of the ratio of the Supreme Court judgment in the case of M/s Tata Consultancy Services. It can be safely stated that software of both categories, personalised as well as branded, are intellectual property, but the personalised one as stated above is neither marketed or made transferable by the licence holder in question. In simple language, a software is an instruction or command which result in the desired function or performance in accordance with the programme, data and other information.

5.VI Technical know-how
Technical know-how is also one more example of the intellectual property. By and large, it contains technical information or technical knowledge relating to design, engineering, installation, operation, maintenance and manufacturing process. In other words, the technical know-how is an asset owned by the person in the form of fomulae, process or the method of manufacture.

5.VII Goodwill
Goodwill is something which grows as the days pass. It is very easy to describe but difficult to define. In simple words, it is the benefit or the advantage gained by a person during the course of carrying on the business because of good service and supply of standard quality of goods. In other words, it is a reputation that may be gained by the person as the time passes as a direct result of the quality of goods supplied with honesty and accuracy. Such qualities will attract the customers as a matter of course because of the good reputation attained by the businessman concerned. It is an intangible asset which by itself cannot be traded separately from the business in question. The goodwill will be created over the years because of reputation, location etc, but it keeps on fluctuating with the passage of time depending on the continuous conduct of the businessman. In other words, in a progressing business upward, the goodwill will increase, while in a failing business, the goodwill will travel southward. It has no independent existence and is attached to a business. In other words, the moment a business is discontinued, the goodwill will vanish.

5.VIII Copyright

Section 14 of the Copyright Act, 1957 define ‘copyright’ as an exclusive right to do or authorised to do certain acts in respect of a work or any substantial part thereof, in regard to the literary work, dramatic work or musical work as also computer programme, artistic work or cinematography films. The provisions of the Copyright Act protect the owner of the copyright against unauthorised copying of his work, but can be allowed to be used by third person on payment of the agreed royalty or can be assigned by executing an agreement to that effect in favour of an assignee (Section 18).

When the work is done for the first time, the person executing that work can be said to be the first owner of the copyright. The copyright is valid during life time of the first owner and till end of a period of sixty years from his death (Section 23).

5.IX Designs registered under the Design Act

Designs Act, 1911 was replaced by Design Act, 2000 which define a design to mean only the features of shape, configuration, pattern, ornament or composition of lines or colours applied to any article by any industrial process or means, whether manual, mechanised, chemical or otherwise. The design when registered confer copy right in the design for a period of ten years from the date of registration. [(Section 11(1)]. The period of validity can be extended before expiry of the statutory ten years period on payment of prescribed fees, but such an extension would only be for five years and not the original period of ten years as was available from the date of registration. The Controller General of Patents, Designs and Trademarks is the authority to register the design. The registration confer a protective right to the registered proprietor. Such right is transferable by assignment or by licence for an agreed consideration [Section 30(4)].

5.X SIM Card used in mobile phones

Subscriber Identification Module card is a card containing computer chips and pre-recorded instructions which can enable the customer to have access to the services rendered by concerned service provider company. Such service would continue to be provided till the SIM card remain activated. The process of activation, consist of putting information in the computer maintained by the service provider company, giving particulars of the amount charged, the ID of the subscriber etc. For activation of such a SIM card, the service provider company charge a fee which is known as activation charges which of course is over and above the amount charged for supplying the SIM card. The SIM card may be pre-paid or post-paid. Such a SIM card, however, is not transferable and no one except the customer concerned can use the facility.

5.XI Franchise

Franchise is statutorily defined as an agreement by which a person is granted representational right to sell or manufacture goods or provide service, identified or associated with the franchisee. In such a case, however, the involvement of trade mark, trade name or logo is not relevant. In other words, it is a privilege conferred by the franchiser on the franchisee as per the terms of agreement between the parties inter se.

6. Change in scenario
   The aspect of levying tax on the goods of intangible or incorporeal nature have been drastically altered by the Constitution bench judgment in the case of M/s Sunrise Associates Vs Government of NCT of Delhi (145 STC 576), read with the earlier judgment by the Constitution bench in the case of M/s BSNL (145 STC 91).

7. It was with the judgment of the Supreme Court in the case of M/s H. Anraj that a pandora’s box was opened in regard to levy of tax on goods of intangible or incorporeal nature. The Supreme Court in that case held that the sale of lottery tickets involved :
   (i) The right to participate in the lottery draw and
   (ii) The right to win the prize depending on chance

8. The Division bench held that the second right to win the prize was a chose in action and therefore not goods, but the first right of participation in the lottery draw was a transfer of a beneficial interest in movable goods for a consideration and therefore was liable to sales tax. Following the said judgment of the Supreme Court, another bench of three judges in the case of M/s Vikas Sales Corpn. (102 STC 106) held REP licence to be related to goods of intangible nature. The court in that case rejected the assessee’s submission that the import licence was nothing but actionable claim as defined in section 3 of the Transfer of Property Act. The bench in that connection observed that the import licences or scrips were being bought and sold in the market freely as dealing with other commodities and when they have the value of their own, unrelated to the value of goods that can be imported thereunder, the licence cannot be considered to be in the nature of actionable claim.

9. Relevant law of the land
   The landmark judgments which have given impetus or encouraged a fresh look about the competency or otherwise of the levy of tax on their transfers between the possessor of the intellectual property and the licensee or the assignee, as the case may be. The judgments in question are :
   (i) M/s Tata Consultancy Services (122 STC 198)
   (ii) M/s Associated Cement Companies Ltd. (124 STC 59)
   (iii) M/s National Thermal Power Corporation (127 STC 280)
   (iv) M/s BSNL (145 STC 91)
   (v) M/s Sunrise Associates (145 STC 576)
   (vi) M/s Godfrey Phillips Ltd (139 STC 537)
   (vii) M/s Imagic Creative Pvt. Ltd (12 VST 371)

Some of them are considered hereinbelow :
9(A)(i) M/s BSNL (145 STC 91)
This judgment is one of the important judgments in relation to levy of tax on goods of incorporeal or intangible nature as well as, as understood under from the Sale of Goods Act. The question posed before the Constitution bench related to the true nature of transaction by which mobile phone connections were enjoyed by the subscribers. Was it a case of sale, service or both? According to the petitioners who were service providers, the transaction did not involve any sale of goods and therefore the levy of tax by the State on the basis of the Supreme Court judgment in the case of State of U. P. vs Union of India (130 SC 01) was unconstitutional and it was only the Parliament which could levy tax on services. The levy of tax on the assumed sales was also challenged. The stand was supported by the Union Government.

9(A)(ii) According to the States, the transaction was squarely covered by the Supreme Court judgment referred to above and as per Article 366(29A)(d), the transfer of right to use was conclusively proved by the telephone companies charging rentals periodically to their customers. Therefore the tax was accordingly rightly levied. On the other side, the assessees contended that the position that prevailed prior to Fortysixth Amendment continued even thereafter in regard to the transactions which were not specifically included in clauses (a) to (f) of Article 366(29A). It was also submitted that providing telephone services involved use of an entire system including immovable properties in the form of telephone exchanges and therefore no goods were involved which can be taxed in the transaction in question. They also denied any transfer of right to use in goods at any stage. According to the petitioners, the system in entirety was a means of communication of message and transmission of signals from caller to receiver.

9(A)(iii) SIM Card having been supplied as an identification device incidental to rendering of service was not a sale of SIM Card as chattel per se.

9(A)(iv) The Supreme court, after considering the rival contentions, framed certain issues in Para 32 at Page 110. After considering the historical background that led to Fortysixth Amendment to the Constitution, the Apex Court observed in Paras 43 & 44 that two aspects of M/s Gannon Dunkerley (9 STC 353) survived even after the Fortysixth Amendment and remained unaffected. In other words, those principles continued to be valid even thereafter. The two aspects covered in Para 44 related first to the definition of the term ‘sale’ which have to be understood as under the Sale of Goods Act, except to the extent of six clauses of Article 366(29A) of deemed sales, especially because the definition of the word ‘goods’ in Article 366(12) was not altered. The second was the dominant nature test that continued to be applied to a composite transaction not covered by Article 366(29A). In other words, the deemed sales which can be taxed under entry 54 of List II were restricted only to the six categories of non-sale transactions and not more.

9(A)(v) In that regard, the Supreme Court referred to Fortysixth Amendment and observed that only three specific situations were chosen from several composite transactions which involve service as well as sale and out of those three, only works contract and catering contract involve both the elements of service and sale. Therefore, those are the only two categories for which it was permissible to bifurcate and no other service was contemplated to be covered or bifurcated. The Supreme Court in Para 46 made an important observation as under :
“The test therefore for composite contracts other than those mentioned in 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.” We will, for the want of a better phrase, call this the dominant nature test”.

9(A)(vi) In view of the above test, it can well be concluded that unless the transaction in reality contemplated two distinct contracts, a composite contract cannot be bifurcated for the levy of sales tax by treating a part thereof as that of sale of goods. In other words, one as to go by the substance of the agreement in the contract.

9(A)(vii) Referring to the observations in the case of M/s Associated Cement Companies Ltd, the Apex Court observed that it no where mentioned that in all cases of composite transactions, the Fortysixth Amendment was applicable. Therefore, the dominant intention of the parties remained a governing factor. In other words, the seller and the buyer must have very same and identical clear ideas about the goods that were agreed to be sold or purchased. For finding out the real intention, the point of view of an average person with normal intelligence will be considered. The Supreme Court, then in Para 52, referred to the definition of the term ‘goods’ in the Constitution, Sale of Goods Act as well as different Sales Tax legislations. Referring to the earlier two judgments in regard to the term ‘goods’ in the case of M/s H. Anraj and M/s Vikas Sales Corpn., the Supreme Court noted that both the judgments were then doubted in the case of M/s Sunrise Associates which was then before the Constitution bench and the judgment was awaited. A very important observation is made in regard to the incorporeal rights in Para 54 to the effect that it would proceed further on the assumption that an incorporeal right was goods. The same observation was repeated in Para 61 for the purpose of levying sales tax. In Para 55, after referring to the judgment in the case of M/s Associated Cement Companies Ltd., it was observed that though in that case the value of drawings were added to the cost of intangible or incorporeal goods in the form of technical know-how, it was recognised that knowledge in abstract may not come within the definition of the term ‘goods’ as defined in section 22 of the Customs Act. This gave sufficient indication that all incorporeal rights may not be goods. Ultimately the same was made clear by the Constitution bench in the case of M/s Sunrise Associates and M/s Imagic Creatives Pvt. Ltd.

Applying the principles laid down by M/s Associated Cement Companies Ltd., and M/s Tata Consultancy judgments, the Supreme Court held that electro magnetic waves were neither abstracted nor consumed or extinguished by their use. Such waves were not delivered, stored or possessed, nor were they marketable. They were merely medium of communication and what was transmitted from the caller to the receiver was not electro magnetic wave but the signal generated by the message. In other words, in the case of telecommunication (mobile as well as land line), what was transmitted was the message and no part of electro magnetic wave was transferred or delivered. Considering that aspect of the matter, the Supreme Court held that the case before it was not covered by Article 366(29A)(d).

The Supreme Court also disapproved its earlier judgment in the case of State of U. P. vs. Union of India and that was accordingly overruled in Para 79.

In Para 84, important observations were made that the deemed sales provided by Article 366(29A) extended the meaning of the word ‘sale’ only to the extent mentioned therein and not further. So saying, the Apex Court held that a telephone service was nothing but a service without involving a sale element, except the accessories when supplied separately.

As regards the SIM Card, the Supreme Court held that there would be no sale of SIM Card, if the same was given to the subscriber as a part of the service but if sold separately, it would result in the sale of SIM Card liable to tax.

10. M/s Sunrise Associates (Constitution Bench – 145 STC 576)

The matter was referred to the Constitution bench in view of the fact that the 3-Judge bench in the case of M/s Vikas Sales Corporation had followed the earlier Division bench judgment in the case of
M/s H. Anraj (supra). In that case, it was held that the sale of lottery tickets involved two rights, one to participate in the draw and second to claim the prize. Out of the two, the first one was held to be relating to goods, holding that the lottery ticket, not for its paper value but when it related to a right to participate in the draw, was goods for the purpose of sales tax. When similar matter came up in the case of M/s Sunrise Associates, the judges doubted the correctness of the judgment in the case of M/s H. Anraj (supra) and therefore the matter came up before the Constitution bench.

10(1) The Constitution bench, after referring to the definitions of the term ‘sale’ and ‘goods’ in various enactments, including the Sale of Goods Act, observed that all the definitions expressly excluded the actionable claim from the definition of the term ‘goods’. The Constitution bench referring to the judgment in the case of M/s Vikas Sales Corpn., observed that the same merely followed the judgment in the case of

M/s H. Anraj and the contention of the assessee that the REP licences or Replenishment licences were actionable claims within the meaning of section 3 of the Transfer of Property Act, was rejected. The Delhi High Court, while considering the case of lottery tickets, held that M/s H. Anraj was an authority for the proposition that lottery tickets themselves were goods. Before the Apex Court, the assessee submitted that the bifurcation made by the Division bench in M/s H. Anraj case as representing two rights as stated above, was an artificial one and the transaction in question represented nothing but chose in action. In regard to M/s Vikas Sales Corpn., it was submitted that that the fact that the same were freely transferable and therefore were goods, was erroneous inasmuch as even actionable claims like negotiable instruments and debentures were freely transferable. As far as DEPB was concerned, the submission was that the same was in the nature of a notional credit which an exporter acquired on export, by way of an entry in the pass book. That credit was utilisable by the importer for adjusting the same against the import duty payable on goods imported. Such a credit was also freely transferable, but for that reason, it cannot be held to be goods; instead of an actionable claim.
10(2) The submissions on behalf of the State of Maharashtra in regard to DEPB were reproduced in Para 27. According to the State, DEPB was nothing but goods as defined in the Bombay Sales Tax Act, 1959, because the same was movable property and not actionable claim, as contended by the assessee.
10(3) The Apex Court in that connection observed that the reference to Constitution bench related only to the question about lottery tickets being not goods and no such reference was made in regard to REP licence, DEPB etc. However, it observed that the Vikas Sales Corpn., judgment only approved the reasoning of M/s H. Anraj and in that context the referring court had mentioned the decision of M/s Vikas Sales Corporation. That controversy therefore was kept open, but indications were given in that regard. The Constitution bench in Para 34 observed that the word ‘goods’ and the word ‘property’ were distinct and separate from each other. For the said purpose, the Court referred to the dictionary meaning of the word ‘property’.

As regards the actionable claim, the Court noted that all statutory definitions expressly and uniformly excluded it from the definition of the term ‘goods’. According to the Court, the term ‘actionable claim’ was also covered by the term ‘goods’, but because of its exclusion statutorily, they are not included for the purpose of levy of sales tax.
10(4) Referring to the distinction between actionable claim and other goods, the Court referred to the judgment of M/s Tata Consultancy Services and
M/s Vikas Sales Corporation and observed that the assumption that the actionable claims were not transferable for value was erroneous. According to the Hon’ble Court, the several species of actionable claim were transferable and therefore transferability was not the point of distinction between actionable claim and other goods which can be sold. Referring to the definition of ‘actionable claim’, the Court held that if a claim to the beneficial interest in movable property was not in the vendee’s possession, but was transferred, it was not a sale of goods for the purpose of sales tax law. Applying the said test, the Apex Court held that the sale of lottery tickets amounted to the transfer of an actionable claim. It was nothing more than a token or an evidence of right possessed by the holder of the lottery tickets and did not involve the sale of goods. The Constitution bench, therefore, held that the decision in M/s H. Anraj case holding the sale of lottery tickets as sale of goods was not a correct law and the same was overruled prospectively.

11. M/s Tata Consultancy Services [(Division Bench (SC) (122 STC 198)] and Larger Bench (137 TC 620)

11.1 In that case, the Supreme Court was considering the appeal by the assessee against the judgment of the Andhra Pradesh High Court in regard to software.

11.2 Software was an instruction that when executed, would provide desired function and performance. Its working largely depended on configuration created by software engineering process. The Supreme Court in Para 4 observed that the computer programmes were the product of an intellectual process, but once that was implanted in a medium, was widely distributed to computer owners. Though the programme as such was copyrightable as intellectual property, but that did not alter the fact that once imbedded in the form of a floppy disc or CD, the programme was tangible, movable and available in the market. Therefore the same were goods.

11.3 Since the ultimate decision would have wider repercussions, especially in regard to foreign trade, the division bench referred the matter to Larger bench for its deeper consideration. The matter (137 STC 620) before the Larger bench was placed before a bench consisting of as many as five judges. After referring to various definitions relevant to the controversy before it, the Court observed in Para 16 that in India, the test for determining; as to whether the property was goods for the purpose of sales tax, was not as to whether the same was tangible or intangible or incorporeal, but (the correct test was as to whether the concerned item was capable of abstractions, consumption and use, as also whether it can be transmitted, transferred, delivered, stored, possessed etc.). Applying the said test, the bench held that in the case of software, both canned and uncanned, all the ingredients of ‘goods’ were present.

The Apex Court held as under in Para 24:

“24. In our view, the term ‘goods’ as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd (2001) 4 SCC 593. A software programme may consist of various commands which enable the computer to perform a designated task. The copyright in that programme may remain with the originator of the programme. But the moment copies are made and marketed, it becomes goods, which are susceptible to sales tax. Even intellectual property, once it is put on to the media, whether it be in the form of books or canvas (in case of painting) or computer discs or cassettes, and marketed would become ‘goods’.

We see no difference between a sale of a software Programme on a CD/floppy disc from a sale of music on a Cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media; i.e., the paper or cassette or disc or CD. Thus a transaction sale of computer software is clearly a sale of ‘goods’ within the meaning of the term as defined in the said Act. The term ‘all materials, articles and commodities’ includes both tangible and intangible / incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes.”

11.4 The Apex Court, though agreed with the assessee that there was no distinction between branded and unbranded software, did not deal with unbranded software, that was not the issue referred to the Larger bench.

12. M/s Imagic Creatives Pvt. Ltd.

The Supreme Court, in this case was concerned with advertisement services of creating the conceptual designs on which service tax was paid, but the commercial tax department sought to recover VAT that led to the matter before the Supreme Court.

12.1 It was a case of composite contract of a service provider, wherein services were rendered to a specific party for a specific issue. The Kerala High Court, following the ratio of the Supreme Court judgment in the case of M/s Associated Cement Companies Ltd & M/s Tata Consultancy Services, held that the assessee was liable to sales tax under the provisions of the VAT Act. Such a finding was challenged by the assessee before the Supreme Court.

12.2 After referring to the earlier judgments, as also the Constitution bench judgment in the case of M/s Tata Consultancy Services and M/s BSNL, the Hon’ble Supreme Court observed that in none of the decisions, the concept of works contract involving both service as also supply of goods was involved (Para 28). After referring to the Constitutional amendment by insertion of Clause 29A in Article 366, the Court observed that a legal fiction that was created by such a clause, should be applied only to the extent for which it was enacted and cannot be applied beyond the point not contemplated by the legislature (Para 31).

12.3 In Para 33, the Court observed that the payment of service tax as also VAT were mutually exclusive. Therefore, either of them should be applicable having regard to the effective parameters as applicable to a composite contract as against an indivisible contract. The Supreme Court also disapproved the aspect theory applied in the case of State of U. P. vs. Union of India (130 STC 01) which was by then overruled by the Constitution bench in the case of M/s BSNL. The Court for that purpose referred to Paras 78 & 79 of that judgment as under :

“78. But if there are no deliverable goods in existence as in this case, there is no transfer of user at all. Providing access or telephone connection does not put the subscriber in possession of the electromagnetic waves any more than a toll collector puts a road or bridge into the possession of the toll payer by lifting a toll gate. Of course the toll payer will use the road or bridge in one sense. But the distinction with the sale of goods is that the user would be of the thing or goods delivered. The delivery may not be simultaneous with the transfer of the right to use. But the goods must be in existence and deliverable when the right is sought to be transferred.”

“79. Therefore whether goods are incorporeal or corporeal, tangible or intangible, they must be deliverable. To the extent that the decision in in State of U. P. vs. Union of India held otherwise, it was in our humble opinion erroneous.”

12.4 The Court, therefore, held that sales tax cannot be levied on the entire contract, but only after excluding the element of services provided therein.

Comment

13. Having considered the background and the meaning of individual items termed by the legislature purported to be that of incorporeal or intangible goods, I would deem it necessary to consider other relevant factors that may arise incidental to the transfer of any of the item of incorporeal or intangible nature. Considering the provisions of Article 246 and the ratio of the Constitution Bench judgment in the case of M/s Godfrey Phillips Ltd. (139 STC 537), the Indian Constitution contain exhaustive enumeration and division of legislative powers of taxation between the Centre and the State. Such a power is mutually exclusive. Therefore, once it is shown that a particular transaction involving items of intangible nature is liable to be taxed under service tax provisions enacted by the Parliament, no sales tax can be levied to the extent of the value on which service tax was levied. In other words, the situation of double taxation on the same facts should always be avoided for which one has to decide the real character and not the nomenclature used by the parties to the agreement. The levy of tax also will have to comply with the constitutional provision of Article 265 under which a tax has to be not only levied, but also collected in accordance with the provisions of law enacted by the competent legislature, may it be the Parliament or State legislature.

While considering as to whether the law is a competent one, the entries in Union List or the State List will have its own impact.

14. Broadly put, the items in question which are sought to be taxed under the sales tax law enacted by the State legislatures, must be usable, movable, saleable and marketable (vide 109 STC 113). The Constitution bench judgment in the case of M/s BSNL (145 STC 91) in Paras 78 & 79, reproduced earlier, distinguished the sale of goods of all kinds, with the ingredients involved in cases of deemed sales as also not covered instances. Thus the goods, whether incorporeal or corporeal, tangible or intangible, must be deliverable and in existence. Many of the instances of such nature, referred earlier, may now justifiably be considered as either that of actionable claim or chose in action, by applying the tests established by the aforesaid landmark judgments.

15. Conclusion

With the above analysis and fall-out of the Supreme Court judgments, would make all concerned to consider afresh the true and correct nature of each category of intellectual property sought to be taxed by the State legislatures even under the VAT system. I feel that there is tremendous scope for re-agitating issues before the Courts of law by applying the tests referred to by the Apex Court in its judgments. The time to come, therefore, would witness quite many litigations in that regard before various forums, may be statutory authorities or the courts of law. I would conclude with the following note :

“One can change the world if he has the right education and knowledge. One can bring a change only if he is open to new ideas.”