After the 46th Amendment to
the Constitution, State Legislatures became competent to levy sales tax on
deemed sales envisaged in sub-clause (d) clause (29A) of Article 366 of the
Constitution. For the sake of understanding, the relevant clause is reproduced
hereunder.
"(29A) ‘tax on the sale
or purchase of goods’ includes:
(a) ......;
(b) ......;
(c) ......;
(d) A tax on the
transfer of the right to use any goods for any purpose (whether or not for a
specified period) for cash, deferred payment or other valuable
consideration;
(f) ......, and such transfer of any goods shall be deemed to be a sale
of those goods by the person making the transfer, and a purchase of
those goods by the person to whom such transfer is made."
In order to levy tax on
transfer of right to use any goods, the States had adopted different approaches; some States had amended
the prevailing General Sales Tax Acts, whereas others had enacted altogether
separate enactments. Under VAT regime effective from 1-4-2005, the States/UT
have adopted a single enactment/act to levy tax on sale or purchase of goods
under different sub-clauses of clause (29A).
In the VAT Act, adopted by
different States/UTs, the definition of Sale includes,
the transfer of the right to use any goods for any purpose (whether or not for
a specified period) for cash, deferred payment or other valuable consideration;
and therefore, liable to VAT. It is further observed in Schedules
appended to the various VAT Acts of different States/UTs that they have incorporated
an entry defined as ‘Goods of intangible or incorporeal nature may be notified,
from time to time, by the State Government in Official Gazette’, which is
liable to VAT at the rate of 4%. The Apex Court’s decision in case of H. Anraj
and Vikas Sales Corporation had already settled down the competency of State Legislatures to levy tax on goods of intangible
or incorporeal nature.
State Governments in view of
power to notify the intangible or incorporeal goods, notified certain
intangible goods such as Patents, Trademarks, Software Package, Technical
Know-how, Designs, SIM Cards, Franchise, etc. It is pertinent to note that
certain States/UTs have picked the definition of term ‘Franchise’ under the VAT
Act verbatim from the Service Tax Act.
Transfer of Right to use
Goods – Deemed sale or service?
Transfer of Right to use
goods for cash, deferred payment or valuable consideration is considered as
deemed sales under sub-clause (d) of Article 366(29A) of Constitution of India
and also consequently under Punjab VAT Act and CST Act liable to VAT and CST
respectively.
Right to use of
tangible goods service has also been brought under service tax net by the
Finance Act, 2008, w.e.f 16-05-2008 vide notification No.
18/2008-ST, dated 10-05-2008.whereby taxable service has been defined u/s
65(105)(zzzzj) of Finance Act, 1994 to mean as
“any services provided or to be provided, to any person, by any other
person in relation to supply of tangible goods including machinery, equipment
and appliances for use, without transferring right of possession and effective
control of such machinery, equipment and appliances”.
The
settled law is that one transaction can be either a service or a sale hence both VAT and service tax cannot be levied on the same
transaction. This may lead to rise a question in one’s
mind that transfer of right to use goods when can be considered as sales and
when service? The attempt is made to answer the question herein this article.
When
Transfer of right to use is a deemed sales: The phrase “transfer of
right to use any goods for any purpose is of great significance to impose tax
on it as deemed sales. The thrust is on the transfer of right to use the goods.
It is important to understand here that in transfer of right to use goods all
the rights except the ownership rights are transferred by the transferor to the
transferee so as to enable him to use the goods at his own will to the
exclusion of the transferor.
Supreme Court in BSNL vs. Union of India (2006) 145 STC 91
(SC) held as under:
To constitute a transaction
for the transfer of right to use goods, the transaction must have the following
attributes:
a. There must be goods
available for delivery;
b. There must be consensus
ad idem as to the identity of goods;
c. The transferee should
have a legal right to use the goods-consequently all legal consequences of such
use including any permission or licenses required therefore should be available
to the transferee;
d. For the period during
which the transferee has such legal right, it has to be for the exclusion to
the transferor this is the necessary concomitant of the plain language of the
statue – viz. a “transfer of the right to use” and not merely a license to use
the goods;
e. Having transferred the
right to use goods during the period for which it is to be transferred, the
owner cannot again transfer the same rights to others.
The judicially evolved
principles to identify a transaction involving the transfer of right to use
goods to be a sale clearly exclude the indispensability of delivery of physical
possession thereof an essential precondition.
The Supreme Court further in 20th century Finance Corporation Limited v
State of Maharashtra- 2000 (6) SCC 12 at 44 ruled that
“(c)
Where the goods are available for the transfer of right to use the taxable event
on the transfer of right to use any goods is on the transfer which results in
right to use and the sites of sale would be the place where the contract is
executed and not where the goods are located for use.
(d)
In cases where goods are not in existence or where there is an oral or implied
transfer of the right to use goods, such transactions may be affected by the
delivery of goods. In such cases the taxable event would be on the delivery of
goods”.
The important attribute
constituting Transfer of right to use goods as deemed sales are that there
should be transfer of effective control and possession of the goods. If the
owner retains effective control over the equipment, it is not a transfer of
right to use.
Other attributes like the
intention of the parties, mode of use and several other surrounding and
relevant aspects have to be considered to come to the conclusion whether or not
under a particular contract, there is transfer of right to use any goods. A
mere contract of hiring, without transfer of control, may be a contract of
bailment and not a contract for transfer of right to use goods.
Transfer of a right to use
goods implies that full liberty is vested in the transferee to have the right
to use goods to the exclusion of all other including the owner of goods.
When transfer of Right to use goods is a service: The Finance Act,
2008 w.e.f 16-05-2008, has levied service tax on such services provided in
relation to right to use of tangible goods, including machinery, equipment and
appliances, for use, with no legal right of possession and effective control.
Excavators, Cranes, dump trucks, high value and sophisticated machineries are usually
supplied for use, without any legal right of possession and effective control.
Such transaction of allowing use of the goods to another person,
without giving legal right to possession and effective control, not being
treated as deemed sale of goods, is treated as service.
The taxable service u/s
65(105)(zzzzj) of Finance Act, 1994 has been defined as under:
“taxable
service means any services provided or to be provided, to any person, by any
other person in relation to supply of tangible goods including machinery,
equipment and appliances for use, without transferring right of possession and
effective control of such machinery, equipment and appliances”.
The Central Government in
its letter D.O. F. No. 344/1/2008-TRU,
dated 29-02-2008 has clarified that ”supply of tangible goods for use
and legible to VAT/sales tax as deemed sales of goods, is not covered under the
scope of the proposed service.
The essential
difference between Transfer of Right to use goods as deemed sales and service
is the transfer of effective control
and possession of the goods and whether such effective control and possession
of the goods is transferred while allowing another person to use the goods is a
question of fact and is to be decided based on the terms of the contract and
other material facts.
Right
to use- whether eligible to Sales tax/ Service Tax?
Transfer of Right to use is
a taxable event in the eye of law. A thin line of demarcation has been made as
to when the activity will be covered under the provisions of Sales Tax law and
when the same will be qualified as a service. To getting a clear understanding
of the same, the provisions laid down are discussed here forth.
Definition of Sales
(Clause (g) of Section 2 of Central Sales Tax act) as amended by Finance
Act,2002 w.e.f 11.05.2002 was expanded and Clause ‘d ‘of Article 366(29A) of
the Constitution was included which defines Right to use as the Deemed Sale.
The context is as below…
… “Transfer of the right
to use any goods for any purpose (whether or not for a specified period) for
cash, deferred payment or other valuable consideration”
The
transactions where hiring of movable property is taking place with an effective
transfer of control and possession of the asset, was covered in the scope of
deemed sale and made eligible to Sales Tax/ Vat.
But, where the assets are being taken on hire
without transfer of custody, control and possession, the same will not qualify
as Deemed sale. Such an event was being brought in the net of Service Tax.
Initially, “Right to use of
tangible goods service” was introduced by the Finance Act,
2008, w.e.f 16-05-2008 vide notification No. 18/2008-ST, dated
10-05-2008.whereby taxable service was defined u/s 65(105)(zzzzj) of Finance
Act, 1994 to mean as .
“any services provided or
to be provided, to any person, by any other person in relation to supply of
tangible goods including machinery, equipment and appliances for use, without
transferring right of possession and effective control of such machinery,
equipment and appliances”.
With introduction of Negative list regime under service tax, w.e.f
1st July 2012 this transaction has been brought under the category
of Declared Service under Section 66E confirming the
applicability of service tax on it. The provision is as below….
…. “Transfer of goods by way of hiring, leasing, licensing or in any
such manner without transfer of right to use such goods.”
Hence, the guiding factor in determination of applicability of
Sales Tax or Service tax on the event of supplying an asset for utilizing the
same is to correctly assess the status of the transfer of RIGHT TO USE of the
asset along with the transfer of an effective control and possession.
|
CONDITIONS
IN THE AGREEMENT OF HIRING OF THE ASSETS
|
FOR QUALIFYING AS SALE
|
FORQUALIFYINGAS SERVICE
|
|
TRANSFER OF:
|
|
|
|
i) Right to use the assets
(i.e. avail service/operate arising on using the assets)
|
YES
|
YES
|
|
ii) Possession of Assets
to customer
|
YES
|
NO
|
|
iii)Effective Control over
Assets
|
YES
|
NO
|
When will it be considered that there has
been transfer of effective control and possession?
On the basis of the above
discussion, it becomes necessary to identify as to when to consider that the
transfer of effective control and possession of the asset have taken place.
In a recent case law “S G S Lamba & Sons Vs State Of Andhra
Pradesh [2012-TIOL-49-HC-AP-CT]” after analyzing the
settled decisions of higher judiciary, the Hon’ble High Court summarized the
essential requirements of a transaction for ‘transfer of right to use goods’ as
follows:
“(iii) In the transaction for the transfer of the right to use goods,
delivery of goods is not a condition precedent, but the delivery of goods may
be one of the elements of the transaction;
(iv) The effective or general control does not mean always physical
control and, even if the manner, method, modalities and the time of the use
of goods is decided by the lessee or the customer, it would be under the
effective or general control over the goods; and
(v) The approvals, concessions, licenses and permits in relation to
goods would also be available to the user of goods, even if such licenses
or permits are in the name of owner (transferor) of the goods, and
(vi) During the period of contract, exclusive right to use goods
along with permits, licenses etc, vests in the lessee.”
Hence, while executing an
agreement of hiring of an asset, we should clearly identify as to how the
transaction is being framed and executed. In scenario, where the assets are
being hired out along with their licenses, permissions and exclusive right to
use, as and when required, on the instructions of the lessee, will be construed
that the effective control on the assets is being passed on.
Let us assess an illustration in accordance to it.
Company ‘A’ has 5 Road
Rollers available for Hiring out.
Case 1: For first 3, the
hiring contracts have been framed where the Road rollers were placed at the
site of the Customer, all the licenses and road permits available for operating
are passed on for the exclusive use of the Customer. The Operators of those
road rollers were to be paid by the Company A, but they were to operate as per
the time schedule and instruction of the Customer.
Case2: For the next 2 road
rollers, the Company A has a set of customers, who place their request for
making the road rollers available to them. Company A, according to the
requirement of the customers, frame the time schedule for these road rollers,
and pass on the instructions to operators to carry out operation accordingly at
the customer’s site.
On assessing of both the
situation, we can distinguish that in case 1, the road rollers were hired out
with transfer of effective control and possession along with its right to use.
Thus will qualify as deemed sale and taxable in the net of VAT. On the other
hand in hiring of road rollers in case2, there has been no transfer of
effective control to the customers and hence the same will qualify as Declared
Service u/s 66E and service tax will be applicable on it.
Deemed Sale- Weather Local or Central Sale
One more dimension, which
needs to be ascertained in case of the above deemed sale is to distinguish such
an event as a local sale or a central sale.
Section 3, clause (a) of the
Central Sales Tax Act, 1956, states that “A sale or purchase of goods shall be
deemed to take place in the course of Inter-State Trade or Commerce if the sale
or purchase occasions the movement of goods from one state to another”
Hence, if the assets in
pursuance to the agreement moved from one state to another will qualify as a
Central Sale. On the same, ‘C’ form may be available and hence may be taxable
@2%.
Input Credit or Cenvat Credit on tax paid on Hire
Charges
To move a step further,
after being able to judge the tax applicable on the event of hiring of asset,
we need to conduct the tax planning of the transaction in order to optimize the
tax cost. Optimization of the tax is dependent to the Output tax liability
against which the credit of the tax paid on the hiring of the assets is
available to set off against the output liability.
A. Input Credit mechanism under Sales Tax/CST
Input credit mechanism is an
essential element of the VAT Regime which permits to set off the VAT paid
earlier, by the registered dealer against the amount of the output vat
liability. VAT payable on the inputs and capital goods which has been used for
the purpose of manufacture or processing or packing of taxable goods qualifies
for the input credit (Note: Though there are some specific exclusions made in
different states vat act).
On similar lines, VAT paid
on hire charges on procuring of assets may be available for input credit in
case the assets taken on hire is being used for the purpose of manufacture or
processing or packing of taxable goods.
B. Cenvat Credit under Service tax
Cenvat credit Rules, 2004
(CCR, 2004) states that the provider of a taxable output service can claim the Cenvat
credit of the service tax paid in respect of Input service.
Rule 2(1) of CCR, 2004 defines input service as…….
…. “(i) used by a provider of output service for
providing an output service;”……..
(The definition of input service has specific
exclusions, but hiring charges is not one of them.)
Thus, if you have taken an asset on hire for
providing the taxable output service, you can avail the Cenvat credit of the
service tax paid on hiring or leasing.
TAX PLANNING ILLUSTRATION
With regard to discussion
made above, we can identify the tax applicable on the Hire charges under different
situation and ascertain the credit mechanism applicability according to the use
for which asset has been put to and the output tax liability relating to it. An
analysis is further done below to check on the Net Hire charges for an organization
under different circumstances.
Two situations with different terms of the
agreement are being discussed below:
In the table below, under
Segment A various conditions of an agreement of transfer of right to use of an
asset are laid down, and in accordance to the applicability of the same, their
tax applicability have been identified under Column 1 to 5. The gross
hire charge is computed under each situation (considering Rs.100 is being paid
as hire charges and the tax applicable accordingly). Following two cases are
discussed for each such circumstance:
- Case 1: VAT
as output tax liability
Conditions:
i. An asset has been taken on hire and put to use for processing or
manufacturing of taxable good.
ii. The
organization has an output tax liability under VAT.
Under this scenario, an organization
can avail the input credit on the Vat amount paid where the same has qualified
as local deemed sale against the output vat liability. Whereas if service tax has been paid then the
same will not be available as Cenvat credit and the tax paid will be an
additional expense on the hire charges, increasing the effective cost. In case
of Central sale, the same can be advantageous against the option of service tax
payable, provided C form has been permitted by Sales tax authorities of the
relevant state.
- Case 2:
Service tax as output tax liability
Conditions:
I. An
asset has been taken on hire and put to use for rendering a taxable service
ii. The organization
has an output service tax liability
Under this scenario, an organization
can avail the Cenvat credit on the Service tax amount paid. The Tax expense
will mitigate irrespective of the location from where the assets are being
brought in to. Where as in case the same has qualified as local deemed sale,
tax paid will be an additional expense against the output vat liability on the
hire charges, increasing the effective cost. In case of Central sale it may be
noted that ‘C’ form will not be available.
Transfer of Right to Use Of an Asset with Different
Conditions In Agreement:-Identification of Tax Applicable and the Effective
Cost Under Vat and Service Tax
GUJARAT
VALUE ADDED TAX ACT, 2003
Sale
— Sec. 2(23)
Sale means sale of goods within the State of Gujarat
for cash or deferred payment or other valuable consideration and includes:
Transfer, otherwise than in pursuance of contract,
of property in goods
Transfer of property in goods, involved in execution
of Works Contract
Delivery of goods on hire purchase or any system of
payment by installments
Transfer
of right to use any goods for any purpose
Supply of goods by any unincorporated association or
body of persons to a member thereof
Supply of goods by a society or club or association
to its members on payment of a price or of fees or subscription or any
consideration
Supply of goods by way of or as part of any service
or in any other manner whatsoever
Supply of goods being food or any other article for
human consumption
Supply by way of barter of goods
Disposal of any goods including any unclaimed,
confiscated, unserviceable, scrap, surplus, old, obsolete, discarded, waste or
surplus product or goods but it does not include mortgage, hypothecation,
charge or pledge.
It is
worth noting that, unlike under predecessor GST Act, there is no separate
definition of Specified Sale (for Lease Rent) is given in GVAT Act. Therefore,
rental incomes of all the goods are taxable under GVAT Act, as against rental
income of only specified commodities being taxable under the GST Act.
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