Q.1 A bakery has opted for payment of lump sum tax under Section 14 of the Gujarat Value Added Tax Act, 2003. “Bread in any form” falls under Entry 9(1) of Schedule I to the GVat Act, 2003. Whether the bakery is required to pay lump sum tax on the sales of bread?
Answer: Hon. Gujarat Value Added Tax Tribunal has held in the case of Star Bakery v. State of Gujarat 2014 GSTB 210 that a bakery which has opted for composition is liable to pay tax even on sale of bread since the rate prescribed for lump sum tax in the relevant notification is 2% of ‘turnover of sales’ which includes taxable as well as tax-free turnover. However I am in respectful disagreement with the view taken by Hon. Tribunal. Hon. Tribunal has failed to take into consideration Section 5(1) of the VAT Act read with the definition of ‘tax’ as given in Section 2(27) of the VAT Act. Section 5(1) of the Vat Act states that the sales and purchases of the goods specified in Schedule I shall be exempt from ‘tax’. The term ‘tax’ has been defined under Section 2(27) of the VAT Act to specifically include lump sum tax under Section 14 of the VAT Act. Thus even if lump sum tax is leviable under Section 14 of the VAT Act on tax free goods, such lump sum tax is exempt under Section 5(1) of the VAT Act. This is more so because if it is held that Section 5(1) of the VAT Act does not exempt lump sum tax then it will be rendered redundant. For a dealer who has not opted for composition he is otherwise not liable to pay tax on goods specified in Schedule I since the levy of tax under Section 7 of the VAT Act is only on goods specified in Schedule II and III of the VAT Act. Thus the only function of Section 5(1) of the VAT Act can be to exempt lump sum tax leviable on tax free goods. Tax appeal has been filed before Hon. Gujarat High Court challenging the judgment of Hon. Tribunal in the case of Star Bakery (supra) and the same is pending for final hearing.
Q.2 A leading burger chain enters into a franchise agreement with Mr. X. Under the franchise agreement, Mr. X is given the right to use the brand name of the burger chain while selling burgers at the shop. Mr. X is required to pay royalty every month to the burger chain. Whether the franchise owner i.e. the burger chain is liable to pay tax under the GVAT Act, 2003 on the royalty amount received from Mr. X?
Answer: This is a grey area for which there are conflicting judgments of different Hon. High Courts. Hon. Madras High Court took a view in the case of S.P.S Jayam & Co. v. Tamil Nadu Taxation Special Tribunal 137 STC 117 (Mad.) that franchise agreement does involve transfer of right to use trademark and therefore sales tax/VAT liability arises on royalty received towards the franchise agreement. Hon. Kerala High Court took a different view in the case of Malabar Gold Pvt. Ltd. 63 VST 497 (Ker.) on the ground that exclusive right to use trademark was not transferred and thus there was no transfer of right to use goods. Hon. Madras High Court has subsequently distinguished the judgment of Hon. Kerala High Court in the case of Vitan Departmental Stores & Industries 68 VST 70 (Mad.) on the ground that at least for the particular outlet the right to use trademark is transferred to the franchisee to the exclusion of others and thus there is transfer of right to use goods. Recently Hon. Bombay High Court has also taken a view in the case of Tata Sons Ltd. v/s State of Maharashtra 80 VST 173 (Bom.) that transfer of right to the exclusion of others is not a pre-requisite for treating a transaction as transfer of right to use goods. According to me, in light of the judgments taking divergent views, if a dealer wishes to avoid litigation and disputes then he should pay tax under the VAT Act on royalty received towards franchisee agreement for transfer of right to use brand name or trademark.
Q.3 Mr. A owns a mobile handset outlet store. As per the agreement of Mr. A with the handset companies, Mr. A is entitled to get discount on purchase price based on the quantum of purchases of handsets made by Mr. A. Such discount is given by way of issuance of credit notes. Based on past experience Mr. A is of the view that while the initial purchase price of the handset is Rs. 100, he is likely to get a discount of Rs. 20 from the handset companies and hence his effective cost would be Rs. 80. On the basis of such presumption Mr. A sells the mobile handset for Rs. 90 to his customer. The handset company charged tax at the rate of 15% on the original sale price of Rs. 100. Mr. A claimed input tax credit of Rs. 15 so charged. Mr. A charged tax of Rs. 13.50 under the GVat Act on Rs. 90 when the handset was further sold to the customer. The handset company did not show tax separately in the credit note of Rs. 20 given to Mr. A and therefore Mr. A did not reverse proportionate input tax credit. Thus as against output tax liability of Rs. 13.50 Mr. A had input tax credit of Rs. 15 and therefore Mr. A claimed refund of Rs. 1.50. The Assessing Officer is taking a stand that Mr. A is additionally liable to pay tax on Rs. 20 on the ground that credit given by the company is a payment on behalf of the customers and also that Mr. A ought to have proportionately reduced credit of Rs. 3 on receipt of credit note. Whether the Assessing Officer is justified in such stand?
Answer: The discount of Rs. 20 is the reduction in sale price of the transaction between the handset company and Mr. A. It is well-settled that discount given subsequently by way of credit notes is an admissible deduction from sale price. This has been recently reaffirmed by Hon. Gujarat High Court in the case of ONGC Ltd. v. State of Gujarat Tax Appeal 50 of 2014 decided on 18-12-2014. Thus correspondingly the purchase price of Mr. A is reduced by Rs. 20. Hence the stand of the Assessing Officer that Mr. A needs to pay tax on Rs. 20 on the ground that it is payment on behalf of customers is completely illegal. Apart from the ground that Rs. 20 is reduction from purchase price and not addition to sale price it can also be alternatively contended that consideration received from third parties is not taxable. Reliance may be placed in this regard to a judgment of Hon. Supreme Court in the case of Nevyveli Lignite Corporation Ltd. v. Commercial Tax Officer 124 STC 586 (SC). In that case the seller was selling goods at subsidised rate and receiving subsidy from Government. Hon. Supreme Court held that the subsidy which was received from a third party could not be treated as part of sale price for the purpose of levy of sales tax.
In so far as reversal of input tax credit is concerned, since the handset company does not show tax separately in the credit note, Mr. A is not liable to reverse input tax credit under Section 11(10) of the VAT Act.
Q.4 Q Ltd. is a unit located in a Special Economic Zone. Mr. P entered into a works contract with Q Ltd. for construction of factory shed. The contract provided for payment of consideration in installments based on percentage of completion of work. Mr. P purchased material from Mr. S and got it transported into the SEZ area. The transporter carried with him the bills raised by Mr. S on Mr. P which contained the details of the goods entering into the SEZ area. The customs authorities present at the entry point of the SEZ area affixed their endorsement on the purchase invoice of Mr. P. Since Mr. P raised invoices on Q Ltd. at a subsequent date on percentage of completion method there was no endorsement of customs authorities on such invoices. The Assessing Officer is denying exemption under Section 5A of the GVat Act, 2003 to Mr. P on the ground that the sale invoice of Mr. P is not endorsed by the customs authorities. Whether the Assessing Officer is justified? Whether Mr. S can claim exemption on sale of material to Mr. P which is going to be used by
Mr. P in the SEZ area?
Answer: Section 5A of the VAT Act makes a sale of goods to an SEZ unit a zero rated sale. Rule 42(2A) of the VAT Rules provides that a dealer claiming a transaction to be a zero rated sale under Section 5A of the Vat Act needs to prepare tax invoice in triplicate. The duplicate copy of the tax invoice needs to be endorsed by the customs authorities deployed in the SEZ area. In the present case Mr. P has got the purchase invoice endorsed by the customs authorities instead of sale invoice since sale was yet to be completed. Thus Rule 42(2A) of the VAT Rules has not been complied with. However according to me Mr. P can still claim exemption under Section 5A of the VAT Act in light of the judgment of Hon. Tribunal in the case of Shandong Tiejun Electric Power Engineering Co. Ltd. v. State of Gujarat S.A. No. 358 of 2014 decided on 19-2-2015 wherein it has been held that Rule 42(2A) of the VAT Rules is directory in nature and therefore if it is otherwise proved that sale was to an SEZ unit then exemption is available. Alternatively Hon. Tribunal has held that sale of goods taking place in SEZ is exempt because of Section 21(1) of the Gujarat Special Economic Zone Act, 2004 which is an overriding provision as held by Hon. Gujarat High Court in the case of Torrent Energy Ltd. v. State of Gujarat 71 VST 582 (Guj.)
Exemption under Section 5A is admissible on sale of goods to SEZ developer/co-developer or SEZ unit. Mr. P is only a contractor and therefore Mr. S cannot claim exemption on sale of goods to Mr. P.
Q.5 Whether a hospital is liable to pay tax under the GVAT Act, 2003 on the use of medicines, implants, consumables, etc used in the course of treatment of patients admitted in hospital?
Answer: According to me a hospital is not liable to pay tax under the Vat Act on the use of medicines, implants, consumables, etc. used in the course of treatment of patients admitted in hospital since there is no agreement to sell-purchase goods in such transactions. Patient enters into an agreement with the hospital for getting cured of his ailment and not for purchase of medicines, implants, consumables, etc. Thus there is no sale as per the Sale of Goods Act, 1930 and neither is such transaction deemed sale under Article 366(29A) of the Constitution of India. Therefore the transaction is not taxable. The observations of Hon. Supreme Court in the case of Bharat Sanchar Nigam Ltd. v. Union of India 145 STC 91 (SC) squarely support such contention. Different Hon. High Courts have also taken such view in the following cases:
- International Hospital Pvt. Ltd. v. State of Uttar Pradesh 71 VST 139 (All.)\
- Tata Main Hospital v. State of Jharkhand W. P. No. 2422 of 2006 dated 7-9-2007.
- Fortis Health Care Ltd. v. State of Punjab Civil WP. No. of 1922 to 1924 of 2012 decided on 23-1-2015.
In Gujarat, the Vat department is taking a stand that tax is payable under the Vat Act on such transactions. Reliance is being placed on Section 2(23)(g) of the Vat Act by which supply of goods by way of or as part of service is included in the definition of ‘sale’. Constitutional validity of Section 2(23)(g) of the Vat Act has been challenged by the hospitals before Hon. Gujarat High Court on the ground that the State does not have competence to levy tax on such transactions. The writ petitions have been admitted and they are pending for final hearing.
Q.6 B Ltd. is engaged in the business of civil construction and manufacturing of tiles. The management decides to demerge the tile manufacturing company into a separate company. A scheme of demerger is proposed and approved by Hon. High Court. What would be the tax implications under the GVat Act?
Answer: The queries that could arise regarding implication under the Vat Act of demerger of a company and my views regarding the same are as under:
(a) What would be the status of the inter-unit transactions that took place between the effective date of the scheme of demerger and date of order of Hon. High Court?
Answer: In so far as amalgamation is concerned, there is a specific provision by way of Section 52 of the Vat Act that introduces a deeming fiction for transactions between the amalgamating companies between the effective date of the scheme and date of order of Hon. High Court. Thus while ordinarily such transactions would be branch transfers, by virtue of Section 52 of the Vat Act such transactions would be sale transactions.
Per contra there is no provision under the Vat Act for demerger. Therefore according to me once the scheme of demerger is approved by Hon. High Court, the two companies would be separate entities for all purposes right from the effective date of the demerger and therefore any inter-unit transactions that took place between the effective date and the date of order would become sale transactions.
(b) Whether consideration received by the company from the resultant company for the demerger is taxable under the Vat Act.
Answer: According to me demerger of an entire unit is a transfer of business and thus the company is not required to pay tax under the Vat Act on consideration received towards such transfer on the ground that it is not a dealer qua such transfer of business. Following judgments of different Hon. High Courts support such view:
- State of Gujarat v. Sayaji Mills 11 VST 650 (Guj.)
- Coromandal Fertilizers Ltd. v. State of Andhra Pradesh 112 STC 1 (AP)
- Kwality Biscuits Pvt. Ltd. v. State of Karnataka 53 VST 66 (Karn.)
- What would be the implication of demerger on the input tax credit balance attributable to the demerged unit?
Answer: Rule 17(11) of the Vat Rules specifically provides for transfer of input tax credit balance to the transferee unit in case of transfer of business. Demerger also involves transfer of business and thus the input tax credit balance attributable to the demerged unit will get transferred to the books and returns of the demerged unit from the effective date of the demerger.
Q.7 Vat authorities conduct search proceedings at the premises of C Ltd. According to the authorities C Ltd. has an outstanding liability of Rs. 3 crores under the GVat Act, 2003. Notice for provisional assessment is given to C Ltd. C Ltd. offers its factory premises which is worth Rs. 4 crores as security. The factory premises is free from encumberances. Even then the Vat authorities provisionally attach the bank accounts of C Ltd. and force the manager of C Ltd. to give post dated cheques towards the proposed liability. Are the Vat authorities justified in their action?
Answer: Section 45 of the Vat Act allows provisional attachment of property during the pendency of assessment proceedings if the Commissioner is of the opinion that it is necessary to do so for the purpose of protecting the interest of the Government revenue. Hon. Gujarat High Court has recently held in the case of Vishwanath Realtor v. State of Gujarat Special Civil Application No. 7210 of 2015 decided on 29-4-2015 that for the purpose of invoking power under Section 45 of the Vat Act it is necessary for the Commissioner to form an opinion on the basis of tangible material on objective facts, on the basis of past conduct of the dealers and on reliable information that the dealer is likely to sell of his properties. Thus in the given case if the possible demand is Rs. 3 crores and the factory premises of Rs. 4 crores which is free from encumbrances has already been given as security then the action of the officer to provisionally attach the bank accounts of C Ltd. is illegal.
The action of collecting post dated cheques in spite of the fact that no orders have been passed against C Ltd. under the Vat Act is also illegal as has been held by Hon. Gujarat High Court in the following judgments:
- Atul Motors Pvt. Ltd. v. State of Gujarat 69 VST 289 (Guj.)
- Bhavesh Trading Co. v. State of Gujarat 73 VST 166 (Guj.)
Kumar Motors v. State of Gujarat SCA No. 12444 of 2014 decided on 10-10-2014.
[Source : Queries replied at Brains’ Trust Session at National Tax Conference held on 12-7-2015 at Ahmedabad]