Sales Tax

1. Garlic Extract Powder Capsules – Whether Medicinal Products or Food supplement?

The German authorities refused to allow the importation and marketing of “garlic extract powder capsules” on the ground that they constituted not a foodstuff but a medicinal product. While explaining the concept of “medicinal product”, the European Court of Justice (ECJ) held that whilst presentation in capsule form is an indicator towards classification amongst medicinal products by presentation, that indicator cannot be the sole or conclusive evidence. Moreover, capsule form is not exclusive to medicinal products. Apart from an excipient, “garlic extract powder capsules” did not contain any substance other than natural garlic and had no additional effects, either positive or negative, as compared to those which derive from the consumption of garlic in its natural state. By contrast, in order to correspond to the definition of a medicinal product by function, a product must have the function of preventing or treating disease. Beneficial effects for health in general, such as those of garlic, are not sufficient. The Court has therefore held that garlic extract powder capsules do not correspond to the definition either of a medicinal product by presentation or of a medicinal product by function. Therefore, they could not be classified as a medicinal product but as food supplements.

Commission of the European Communities vs Federal Republic of Germany - PRESS RELEASE No. 84/07 dt. 15th November 2007. Judgment of the ECJ in Case C-319/05.

2. Business — Award of 3G licences by the State/ National Authority by public auction does not constitute “economic activity”/business

Award of such licences allows the economic operators to offer their services to the public on the mobile telecommunications market in return for remuneration. That activity falls exclusively within the competence of the Member State concerned and constitutes the means of fulfilling the conditions laid down by Community law, for the purpose, inter alia, of ensuring the effective use of the frequency spectrum and the avoidance of harmful interference between radio-based telecommunications systems and other systems. That activity of the competent national authority cannot constitute participation in that market. Only the economic operators, who are the holders of the rights granted, operate on the market by exploiting the property in question for the purpose of obtaining income therefrom on a continuing basis. Furthermore, the fact that the issuing of the frequency use rights at issue gives rise to a payment cannot affect the legal status of that activity.

T-Mobile Austria GmbH and Others, Republik Österreich Hutchison 3G UK Ltd and Others vs. Commissioners of Customs & Excise - PRESS RELEASE No. 44/07 dt. 26th June, 2007 - Judgment of the ECJ in Case C-284/04 and Case C-369/04.

3. Indivisible contracts for creation of concepts, designing brochures and other advertisement material – Not liable to ST/VAT

Advertising agency engaged in providing advertisement services like creating original concepts, designing advertising material for clients, designing brochures, annual reports, etc. which were then delivered. On an application of the dominant nature test as laid down in BSNL’s case 145 STC 91 (S.C.), and the legal position expounded in Gannon Dunkerley’s case that if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366(29-A) 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, which may be called the “dominant nature test.”

What are the goods in a sales transaction, therefore, remains primarily a matter of contract and intention. The seller and such purchaser would have to be ad idem as to the subject-matter of sale or purchase. The court would have to arrive at the conclusion as to what the parties had intended when they entered into a particular transaction of sale, as being the subject-matter of sale or purchase. In arriving at a conclusion the court would have to approach the matter from the point of view of a reasonable person of average intelligence and look to the facts of each case.

If in a contract, an element to provide service is contained, the purport and object for which the Constitution had to be amended and clause 29A had to be inserted in Article 366, must be kept in mind. Legal fiction is created by reason of the said provision but such a legal fiction should be applied only to the extent for which it was enacted. It, although must be given its full effect but the same would not mean that it should be applied beyond a point which was not contemplated by the legislature or which would lead to an anomaly or absurdity. Hence, contracts for services – where the subject matter of the contract is rendering of services per se and not sale/transfer of goods - would continue to be outside the purview of sales tax laws.

Imagic Creative Pvt. Ltd. vs. Commissioner of Commercial Taxes – Civil Appeal No. 252 of 2008 dt. 9-1-2008.

4. TDS on Inter-State Works Contracts

Following Steel Authority of India Ltd. vs. State of Orissa and Others 2000 (3) SCC 200 the S.C. held that the High Court was right in holding that Sec. 35 of Chhattisgarh Commercial Tax Act, 1994 was constitutionally invalid.

State of Chhattisgarh and Others vs. VTP Constructions  Appeal (Civil) 5679 of 2007 decided by S.C. on 7-12-2007.

5. Rectification of mistake

In order to attract the application of rectification provisions, a mistake must exist and the same must be apparent from the record. The power to rectify the mistake, however, does not cover cases where a revision or review of the order is intended. In the present case, the Revenue intended to substitute the order which was not permissible. A decision on a debatable point of law or fact or failure to apply the law to a set of facts which remains to be investigated cannot be corrected by way of rectifications. Hence, the U.P. High Court was not justified in holding that there was a mistake apparent on the face of the record.

Deva Metal Powders Private Limited vs. Commissioner, Trade Tax, Uttar Pradesh — Civil Appeal No. 5607 of 2007 decided by the S.C. on 4-12-2007.

6. Concessional rate on sales to Canteen Stores Department

Only sales to Canteen Stores Department (CSD) were eligible for concessional rate of tax and not when sales invoices were issued in favour of individual purchasers coupled with insurance / financing documents not being raised in favour of CSD but the individual purchasers. While higher rate of tax was held as applicable, penalty levied was set aside on the ground that the practice of arranging cars for individuals without stocking by CSD was being followed over the years without there being a deliberate intention to defy the law.

Kulathunkal Motors vs. STO (2007) 10 VST 195 (Kerala)

7. Purchase Tax on transfers for exports

When goods were transferred to Head Office outside the State for the purpose of export therefrom, P.T. could not be levied on the ground that transfers were effected other than by way of sale.

H.M. Mehta & Co. vs. State of Haryana & Anr. (2007) 10 VST 173 (P&H)

8. Composition Scheme for Works Contracts vis-a- vis Inter-State purchases

1. The scheme of composition provided that Dealers using goods purchased from outside were not entitled for option of paying tax at compounded rate. It was held that while the provision did not restrict flow of trade and hence was not violative of Article 301 of the Constitution, it was discriminatory and hence violative of Article 14 of the Constitution as no legally tenable purpose was sought to be achieved by such classification of dealers.

Maruthi Constructions vs. Govt. of Andhra Pradesh and Anr (2007) 10 VST 362 (A.P.)

2. The benefit of composition in respect of works contracts was denied in view of the amendment to s. 17(7) of the Karnataka Sales Tax Act, 1957, which provided that if a dealer purchased or received goods from outside the State for execution of works contract within the State, it was not entitled to the benefit of composition in terms of s. 17(6). As, undisputedly, the appellant had received the goods by way of stock transfer, in view of the language employed in the amended provision, the S.C. held that appellant was clearly disentitled from composition for availing the benefit under s. 17(6).

Indian Dairy Machinery Company Limited vs. Assistant Commissioner of Commercial Taxes – decided by the S.C. on 22nd Jan, 2008.

9. Exemption from sales tax

Exemption from sales tax was granted to all small scale industrial units registered with the Director of Industries. The assessee was recognized and certified as a small industrial unit engaged in the activity of re-packing of edible oil. Having granted the exemption with the open eyes to this particular industry, the State could not be allowed to run around and take a stance that the appellant — assessee was not entitled to the exemption solely on the ground that it did not manufacture any goods. Appeal was allowed.

Pondicherry State Co-operative Consumer Federation Limited vs. Union Territory of Pondicherry (2007) 10 VST 630 (S.C.)

10. Branch transfers

Stock Transfers from Karnataka to Maharashtra were allowed in the original assessments after due verification. The said transfers were sought to be reassessed as deemed sales on the ground that they were a direct result of prior orders by customers in Maharashtra. The Central Sales Tax Appellate Authority held that while the Tribunal was right in holding that the stock transfers were really in the nature of inter-State sales, in view of the acceptance of Forms F, the deeming fiction and conclusive presumption adumbrated by section 6A(2) came into play and it was not open for the Assessing authority to reopen the concluded assessment even if new material came to light subsequently. Reassessment could be initiated only on grounds of fraud, collusion, misrepresentation and wilful suppression of facts or when order passed initially was found to be void or voidable or vitiated by a jurisdictional error.

Steel Authority of India Ltd. vs. Govt. of Karnataka (2007) 10 VST 451 – CSTAA, New Delhi

11. Rate of tax as per Notification – Electronic goods

Capacitors were stated to be electronic goods in Government order and the Electronic Commission had ratified this fact. The S.C. held that the Tribunal was incorrect in applying the “User test” or “Functional test”. Only if the item was not included in the List prepared by the Electronics Commission, it was open to the Tribunal to consider its placement on the basis of the functional test.

State of Andhra Pradesh and Another vs. Concap Capacitors and Others (2007) 10 VST 204 (S.C.).

12. Purchase against Declaration – Contravention of recitals

The Certificate of Registration indicated that the raw materials purchased would be utilized in the manufacture of “Bulk Premix”. Transfer clearly fell within the expression “any other purpose” mentioned in the 5th proviso to s. 5(1) of the Orissa Sales Tax Act, 1947. As the goods manufactured were not sold but were transferred outside the State, there was a violation of the terms of the declaration in Form IV and the assessee was rightly held to be liable for payment of the differential tax payable on the raw materials purchased at concessional rate of tax by 4% paid by furnishing Form IV.

ICI India Limited and Anr. vs. State of Orissa and Ors. (2007) 8 SCC 629

13. Transfer of a closed business

The Gujarat HC has held that transfer of a closed business along with all its assets and liabilities was not liable to tax.

State of Gujarat vs. Sayaji Mills No. 1 (2007) 11 VST 650 (Guj.)

14. Exports

When traders from Nepal purchase goods from India and carry them at their convenience to Nepal, the sales so effected would not be in the course of export.

Rajesh Spices (2007) 11 VST 303 (U.P.)