The Residential Refresher course for members of the ITAT : Expectation of stake holders – The Bench and the Bar are both trustees of the institution and the onus is on them to preserve its dignity, sanctity and purity.

In the Residential Refresher Course held from 17th July to 24 July 2017, at Judicial Academy in Mumbai, one of the subjects of discussion was the “Expectation of stake holders”. Representatives of different ITAT Bar Associations have made various suggestions which need to be considered in the right spirit for better administration of justice. Few of them are as under:

1. All the Bar associations have strongly opposed the new Rules for the appointment of members of the ITAT on tenure basis.

2. The Bar Associations are of the view that the President of the ITAT has to be selected from amongst the members of the ITAT.

3. The appointment of members of the ITAT and promotion of the members of the ITAT must be done on priority basis

4. There should not be any quota for disposal of number of matters by the Members which affects the quality of the orders.

5. Considering the pendency of the matters in any particular zone, the number of Benches may be increased or decreased to better suit the requirements of Bench strength.

6. Proper infrastructure must be provided for better administration of justice.

7. Appointment of departmental representatives on short term basis before the ITAT should be avoided.

We are of the opinion that an assessee rings the bell of justice in the Tribunal only when the assessing officer levies taxes or makes additions which are not in accordance with the law. As appeals involve time and money, both of which the assessee can ill afford to spend, it is natural that he makes a careful cost benefit analysis and elects to appeal only when the stakes are high and there are chances of success. An assessee is no academician and he does not derive any pleasure in obtaining a judgment for the sake of publicity or for laying down a legal precedent. The Tribunal is the final fact finding authority for Income Tax purposes, however the Tribunal being a creature of statute, it cannot traverse beyond the provisions of the statute. The Supreme Court in UOI v. Delhi Bar Association AIR 2002 SC 1347 has observed- ‘Tribunals whether they pertain to Income tax, Sales tax or Excise and Customs or Administration, have now became essential part of the judicial system in this country. Such specialised institutions may not strictly come within the concept of the judiciary, as envisaged by Article 50, but it cannot be presumed that such Tribunals are not effective part of the justice delivery system, like courts of law”. Therefore the Tribunals have greater responsibilities towards the taxpayers of our country. The members of the Tribunal may have to bear in mind that in hearing the appeals they are not merely adjudicating on the issues before them but they are invariably deciding on the fortunes of the assessees. It is moot to consider that a wrong decision against an assessee may ruin his life and relegate him to the position of a pauper. Hence the Tribunal has a greater responsibility towards the citizen. Judicial decisions should not be influenced by the media reporting or personal knowledge of the Members, the matters have to be decided as per the law and facts available on the record.

8. The Bar also has an equal responsibility to assist the Court to deliver qualitative judgments and strive for the independence of the Institution. The Federation has published a “Practical guide for appearing before ITAT” which was published in (2013) AIFTPJ and, for those who desire to make an effective representation before the Tribunal. Professionals may refer the same, which can save substantial time of the Tribunal and also help reducing the pendency before the Tribunal.

It is desired that there must be an Annual Refresher Course for the Members of the Tribunal which can help in rendering better administration of justice.

Proceedings of the inaugural session and first technical session on the subject of “Expectation of the stakeholders” is published on page 75 of this issue for the benefit of the readers. Readers may send their objective suggestion for better administration of justice.

Dr. K. Shivaram

Most of the States of the country have framed law with a view to levy tax on the entry of the goods into a local area of the State for consumption, use and sell therein. It is pertinent to mention that Clause (3) of Article 246 of Constitution confers power to make laws for such State or any part thereof with respect to any of the matter enumerated in List II of the Seventh Schedule of the Constitution of India. The power of the State Legislature in enacting the Entry Tax Act has to be traced to Entry 52 enumerated in List II of the Seventh Schedule of the Constitution of India. However, recently such laws have been amended to provide for that entry tax shall also be leviable on the entry of goods imported into a local area from any place outside the local area including a place outside the country. The issue that arises is as to whether the State Legislature is competent to enact a law levying entry tax on the entry of goods imported in the local area of the State from outside the country.

The Constitution of India is unique in the sense that it contains an exhaustive enumeration and division of the legislative powers of taxation between the Centre and the States. A scrutiny of Lists I and II of the VIIth Schedule to the Constitution of India would show that there is no overlapping anywhere in the taxing power and the Constitution gives independent source of powers to the Union and the States. Under the three lists of the VIIth Schedule to the Constitution, a taxation entry in a legislative list may be in respect to an object or an event or may be with respect to both. Article 246 makes it clear that the exclusive powers conferred on the Parliament or State to legislate on a particular matter includes the power to legislate with respect to that matter. Hence, where the entry describes an object of tax, all taxable events pertaining to the object are within that field of legislation unless the event is specifically provided for elsewhere under a different legislative head. The logical corollary of holding that taxes are imposed only on taxable event is that even when an entry speaks of a levy of tax on goods, it does not include the right to impose taxes on taxable event which have been separately provided for in other taxation entries.

The tax in respect of goods has sometimes been referred to as a tax on an aspect of goods, and sometimes a taxable event. But there can be no overlapping in the field of taxation and if such a tax is specifically provided for in a legislative entry, the same effectively narrows the field of taxation available under other related entries. The State therefore cannot, under the guise of levying tax under any of the entries of the State List, impinge on the exclusive power of the Union under any of the entries of the Union List. The State, therefore, while exercising the power under Entry 52 of the State List i.e. while levying tax on the entry of the goods into a local area for consumption, sale or use therein, cannot levy tax on the fields covered by the Union List or cannot impinge the exclusive power of the Union to levy tax or duties under the Union List. Therefore, the State while levying tax under Entry 52 of List II cannot entrench upon the power of the Union to levy tax or duties on certain transactions and/or events which fall within the exclusive domain of the Union by virtue of the specific entry in List I of the VIIth Schedule to the Constitution of India.

Articles 245 and 246 distribute legislative powers between Parliament and the State Legislature as per the three lists set forth in the VIIth Schedule to the Constitution of India. Entry 41 deals with trade and commerce with foreign countries, import and export across customs frontiers, definition of customs frontiers. Entry 83 deals with duties of custom including export duties. Thus, Union is empowered to make any law with regard to trade and commerce with foreign countries as well as the levy of the duties of custom. The duty of customs is leviable on the import of the goods into India. All levy connected or related to the import of the goods is within the exclusive domain of the Union.

The object of insertion of Entries 41 and 83 in the Union List is to place the import as well as the foreign trade beyond the taxing powers of the State. It is Parliament alone which can make laws with respect to foreign trade. If the import or export transactions are to be subjected to any duties or taxation, it is only the Union which can impose such a tax. A transaction which amounts to import of goods into the territory of India cannot be converted into entry of goods into a local area so as to empower the State to levy entry tax on such import from outside the country. If such an interpretation is given to Entry 52 of List II of the VIIth Schedule to the Constitution of India, the very purpose of Entries 41 and 83 of the List I of the Constitution of India shall become otiose.

When a field of taxation is specifically covered under the Union List, the same must be deemed to be excluded from the State List and the State shall have no power to levy tax on the subjects which falls within the purview of any of the entry of List I. When goods are imported from abroad, the transaction is a single transaction commencing with agreement of sale with overseas suppliers and terminating when the act of importation is for use in the local area of the State. It is the entry into a local area for use or consumption that gives rise to a levy. Entry 52 of the State List does not contemplate levy of entry tax on goods imported from outside the country inasmuch as the same would amount to levy of tax on import of goods into the country which is a subject matter covered by Entry 83 of List I of VIIth Schedule to the Constitution of India.

Further Article 286 of the Constitution of India also puts restrictions upon the imposition of tax on the sale or purchase of goods where such sale and purchase
inter alia takes place in course of import into the territory of India or export of the goods outside the territory of India. The object and purpose of putting such restriction on the power of the State to impose tax in course of import into the territory of India or export of the goods outside the territory of India is in conformity with entry 41 of List I of Seventh Schedule of Constitution of India by which trade and commerce with foreign country in the course of import and export of goods has been kept within the exclusive domain of the Union. The intention of framers of the Constitution, while distributing the legislative powers between State and Union, was to keep import into the territory of India or export of the goods outside the territory of India to be solely within the domain of Union. Levy of any tax or duty on the import into the territory of India or export of the goods outside the territory of India is solely within the domain of Union. In case, the State is permitted to levy entry tax on import into the territory of India under the guise of Entry 52 of list II of Seventh Schedule of Constitution of India, the same would amount to levy of tax on import of goods into the territory of India which will go against the spirit and intent of the Constitutional provisions to keep the foreign trade outside the purview of the State and would also amount to entrenching upon the power specifically reserved for the Union.

On the basis of the Pre-budget Memorandum on Direct Taxes sent by the AIFTP, Shri S. R. Wadhwa, Chairman, Direct Taxes Representation Committee (DTRC) was invited by the High Powered Committee, set up by the Finance Minister, to give evidence on the issues requiring changes in law or rules so as to reduce tax litigation and improve tax compliance.

The meeting was held in the Committee Room of the India International Centre, New Delhi on Wednesday, 31st December, 2014 between 3.30 p.m. and 5.30 p.m. The Committee was chaired by Dr. Ashok Lahiri, Chief Economic Advisor (Retd.) and Shri Siddharth Pradhan, former Chief Commissioner of Income-tax and Vice-Chairman of the Income-tax Settlement Commission, and Gautam Ray, former Chief Commissioner of Customs and Central Excise. The secretaries to the Committee, namely Dr. Vinod Shah, Jt. Secretary, CBDT, Ms. Heman Bikapriya Jt. Secretary, CBEC were also present. AIFTP was represented by Shri S.R. Wadhwa, Chairman, DTRC, V. P. Gupta and Rajesh Joshi, Members, DTRC, A.K. Srivastava, Vice-Chairman – North Zone, AIFTP and Ajay Wadhwa, Member, AIFTP and President, ITAT Bar Association, New Delhi.

A detailed Memorandum was submitted to the Committee which also included inputs by the ITAT Co-ordination Committee headed by Dr. K. Shivaram. It was explained by the Chairman, DTRC in detail. The issues included the need for a proper litigation policy, enlarging the scope of the Income-tax Settlement Commission, reducing the transaction limit for resident tax-payers before the Authority for Advance Rulings from Rs. 100 crores to Rs. 10 crores, making all orders of the CCITs/CITs appealable to the Tribunal; amendment of section 255(3) of the Income-tax Act, 1961 to increase the jurisdiction of the Single Member Bench of the ITAT, listing of common issues pending before the Courts and priority hearing and their priority disposal; amendment of section 158A of the Act requiring the revenue also to avoid repetitive appeals; issue of quarterly circulars by the CBDT making its stand known of every High Court judgment involving legal issues and disposal of appeals by the CITs in a time bound manner.

After discussion of the issues involved in the Memorandum, the Committee desired to know the sections of Income-tax Act which were promoting large scale litigation. Shri Ajay Wadhwa, Member AIFTP and President ITAT Bar association, New Delhi mentioned huge tax litigation arising out of section 14A and Rule 8D of the Income-tax Rules, 1962; and also sections. 153A and 153C. Shri S. R. Wadhwa mentioned about the large transfer pricing disputes, and the forced admission of the amount of concealment made during searches. Shri V.P. Gupta dwelt upon the difficulties arising out of the non-disposal of appeals by CITs (A) due to uneven workload and inadequate supervision. He also mentioned the need to provide against the levy of penalty u/s. 271(1)(c) of the Act where in the quantum appeal, the income is reduced or otherwise modified. He also pointed out certain anomalies in the valuation of perquisites on account of housing and use of car. Shri A. K. Srivastava stressed that the interest, being compensatory in nature, should be increased to 12% for delayed refunds. Shri Rajesh Joshi required the need to increase the number of CITs(A) so that the heavy pendency of appeals, largely in small cities can be cleared. On this point, Shri S. K. Poddar, Immediate Past-President, AIFTP, had also sent a note, ideas from which were emphasised by Shri S. R. Wadhwa.

The President and office bearers of ITSC Bar Association were also present. The President of that Association stressed the need for enlarging the scope of the Settlement Commission particularly because only one chance in a lifetime is given to file a settlement application.

Several clarifications were sought by the High Powered Committee which were duly furnished. After a prolonged discussion, the Committee desired short notes on some issues by 5th January, 2015 and the nature of amendments that would be needed. Such notes would be furnished by the due date.

Sales Tax

1. ‘C’ Form

Whether the provision contained in Rule 6(b)(i) of the CST (Karnataka) Rules, 1957 providing for filing of ‘C’ forms marked as “original” to claim the benefit of concessional rate of tax was to be treated as directory or mandatory ? Held : as mandatory.

2. The Apex Court was seized of the same problem in the case of
India Agencies (Regd.) v. Addl. Commr. of Commercial Taxes, Bengaluru (2005) 139 STC 329 (SC), wherein it has been held on the construction of the aforesaid rule that in order to claim concessional rate of tax, the original ‘C’ form was required to be attached to the return. Therefore, the requirement was not a mere formality or technicality but it was intended to achieve the object of preventing the forms being misuse for the commission of fraud and collusion with a view to evade payment of taxes. The statutory provisions i.e. the rule in this regard have to be construed strictly without producing the original ‘C’ form as prescribed under the State Rule as referred to above r/w section 8(4) of the CST Act, the concessional rate of tax could not be availed of.

P.S. Readers may kindly note that this judgment is based on the State (CST) Rule 6(b)(i) which clearly mandates that ‘C’ form is required to be attached to the relevant return. Hence, SC interpreted the said rule r/w section 8(4) of the CST Act.

Fosroc Chemicals (India) Pvt. Ltd. v. State of Karnataka 2014-15 (19) KCTJ 233 (Kar.).

2. Ex parte Order

Ex parte assessment order which was confirmed by the ex parte appellate order on the alleged ground of non-appearance of the petitioner and non-production of documents, accounts and other substantive evidence. Plea of the petitioner that all the aforesaid documents were lying before the assessing authority which were not considered and appellate authority also without consulting the charge records passed by the ex parte order. Direction of the Board to the Departmental representatives to produce the charge record and non-production of the same by the Dept. In the circumstances, whether case could be remanded back to the appellate authority? Held: The petitioner claims on the points of disputes and his submission against the allegations made by the AO should be re-examined. However, before this Forum, no charge record was produced by the Dept., therefore, there was no way and means before the forum to verify the allegations made against both the authorities. Hence, the forum is of the opinion that instant revision petition ought to be remanded back to the appellate authority for fresh hearing subject to the verification of all the books of account, records and documentary evidence of the petitioner arising out of the impugned assessment order as well as verifying the authenticity of allegations made by the assessing authority as no fruitful verification has been made at the appellate stage before. Accordingly, the impugned ex parte order of the appellate authority was set aside and directed to make fresh hearing in accordance with law.

Rajesh Processing Corporation v. Sr. Jt. Commissioner, CT, Kolkata (2014) STA Vol. 64 P 23 (Board 79).

3. Input tax rebate

Motor vehicles are capital goods as defined in section 2(f) of Delhi VAT Act, and purchased thereof would form part of the business, but input tax credit was not available thereon. Section 6(3) of Delhi VAT Act provides that where a dealer sells capital goods which he had used exclusively for purchases other than making non-taxable sale of goods, and had not claimed a tax credit in respect of such capital goods, the sale of such capital goods shall be exempt from tax. The Delhi HC therefore held that the sale of used motor cars were exempt from tax u/s 6(3) of Delhi VAT Act and were not liable to tax, as no input credit is granted to a dealer on purchase of motor vehicles as they are not dealers in motor vehicles.

Anand Decors And Ors. v. Commr. of TT, New Delhi (2015) 26 STJ 22 (Del.).

4. Reassessment

Whether the prescribed authority could initiate a reassessment u/s 39(1) of the KVAT Act without first recording his satisfaction/belief that there was an underassessment of the tax liability and communicating the same to the dealer ? Held: As no.

2. Section 39 provides that, where the prescribed authority has grounds to believe that any return furnish which was deemed as assessed or any assessment was done u/s 38 understated the correct tax liability of the dealer, then, it may proceed to reassesse and also do reassessment in addition to such earlier reassessment. It is clear from the language of section 39, before that provision could invoked there should be grounds to believe that any return furnished earlier understated the correct tax liability. Unless such ground exist, the assessing authority has no jurisdiction to initiate reassessment proceedings. In fact, the question, what did the expression ‘reason to believe’ means was the subject matter of the judgment of the Bombay High Court in state of
Maharashtra v. Ketan Enterprises (2010) 30 VST 356 (Bom.). In the light of this judgment and following the same, in the instant case, the Govt. Advocate made available the records. It clearly sets out the reason for initiating the reassessment proceedings, and, therefore, it could not be said in the case that the assessing authority has not stated in writing the reasons for initiating proceedings u/s. 39(1) of the Act. Therefore, on the question of law, we hold that the prescribed authority cannot initiate re-assessment proceedings u/s. 39(1) of the KVAT Act, without first recording his satisfaction/ belief. In the instant case, as the said requirement was complied with, we hold that there is no substance in the contention of the petitioner.

Fosroc Chemicals (India) Pvt. Ltd. v. State of Karnataka 2014-15 (19) KCTJ 233 (Kar.)

5. Remand – Powers of Tribunal to exercise

The power of remand by the Appellate Authority could only be exercise in the ends of justice and not for oblique purpose and for any excuse only with a view to provide a fresh innings to the revenue. In the present case, we noticed that explanations had not been corroborated by the record and
prima facie the figures stated by the Appellate Authority appeared to be incorrect regarding purchase, an examination and appreciation of each parchase should have been done and a clear cut finding of fact should have been recorded, but that was not done either by the AO or by the First Appellate Authority.

2. In such view of the matter, the court did not find any illegality in the impugned order, and therefore revision failed and was accordingly, dismissed.

M/s Usha Steel, Rajpur Chungi Agra v. Commissioner Commercial Tax Lko (2014) 49 PHT 584 (All).

6. Sale of ‘Used Cars’

The KVAT Act, 2003: Whether the benefit of tax rates reduction granted through Notification No. FD-300 CSL 2005 dated 24-10-2005 was applicable for ‘used cars’ was also applicable for demo cars sold by the petitioners after certain point of time ? The HC held sale of ‘demo cars’ was liable for tax at the applicable rates as these cars were purchased by the petitioners on payment of tax and this fact was not noticed. Similarly, when the said cars were sold, whether the said input tax paid by the petitioner was deducted out of the output tax payable was also not place of record and not considered. It is in the review petition, the above facts were brought to the notice of the Court. Hence, the petitions were dismissed.

M/s Mandovi Motors Pvt. Ltd., Manglore v. State of Karnataka 2014-15 (19) KCTJ 261 (Kar.)

7. Sale price

Receipts of rebates, discount, incentive and brokerages by the petitioner from the principal (manufacturer) for better performance. Petitioner showed the receipts in the credit side of the P & L A/c. as miscellaneous income. Addition of the aforesaid receipts to the gross turnover and taxable turnover and treated the same as part of sale price by the Appellate Authority without issue of show cause notice. Whether such action of the Appellate Authority was justified. Held, in the negative by following the decision of the West Bengal Taxation Tribunal in the case of
S. Bhattacharjee & Co. v. ACCT (2010) 55 STA 75 (WBTT).

A.M. Mobile Telecom Pvt. Ltd. v. Jt. Commr. Kolkata (2014) STA Vol. 64 P 31 (Board 87).

8. Schedule Entry

A. Schedule Entry B-17 under the HVAT Act, 2005 was under the consideration of the Haryana HC with reference to ‘Yakult’ (fermented milk drink). As per the statement for clarification submitted before Govt. for clarification the facts stated by the applicant were that they were manufacturer of fermented milk drink and sold the product under the brand name of ‘Yakult’. It was claimed that the said product was similar to ‘Lassi’ and marketed all across the world as fermented milk drink and it contained ingredients viz. (i) skimmed milk powder, (ii) water, (iii) sugar, (iv) glucose and (v) more than 6.5 billion live Lactobacillus Caseistrain Shirota.

2. The matter was examined. The various technical analysis reports submitted by the applicant indicated that ‘Yakult’ was a ‘sweetened flavoured fermented milk’ like ‘Lassi’ but the applicant did not say that it was ‘Lassi’. In this connection, on a clarification sought by M/s Nestle India Ltd., Gurgaon, it was already clarified that “Fruit ‘n’ Milk” and “Fruit ‘n’ Dahi” marketed by Nestle in these brand names were commodities commercially different from “milk” and “curd” and, hence, liable to VAT as unclassified goods.

3. In the light of the above, as the product ‘Yakult’ which was a product different from ‘Lassi’ in common and commercial trade parlance and did not find mentioned in any of the schedules appended to the Act, and, hence, liable to VAT as unclassified goods. Accordingly, issue stands clarified as above.

M/s Yakult Danone India Pvt. Ltd., Sonepat v. Addl. Chief Secretary to Govt. of Haryana, Excise and Taxation Dept. (2014) PHT Vol. 49 Part-8 P 578.


Cell phone battery charger sold along with cell phone in the solo pack, liability to tax. The AO, the Appellate Authority and the Tribunal held that the battery charger is not a part of the mobile / cell phone while the Division Bench of HC (Punjab & Haryana) held that cell phone battery charger is sold as a composite package along with cell phone, and, hence, said charger could not be excluded from the Schedule Entry for concessional rate of tax which applied to cell phones and parts thereof.

2. The Apex Court in appeal by placing reliance on the judgment in the case of
M/s Annapurna Carbon Industries Co. v. State of A.P. (1976) 2 SCC 273 held that the battery charger cannot be held to be a composite part of the cell phone but was an independent product which can be sold separately, without selling the cell phone.

State of Punjab and Ors. v. Nokia India Pvt. Ltd. 2014 NTN (Vol. 56) 407 (SC).

D. H. Joshi, Advocate

Economic Times (ET) Global Business Summit – 2015 was held at New Delhi on 16th and 17th January, 2015 which was attended by more than 700 global and Indian CEOs. In a rare appearance at media event, Prime Minister Narendra Modi used the said opportunity offered by the Summit to present his comprehensive economic and political vision in a 45-minute electrifying speech. Number of Indian INC, Global Gurus lauded Modi for his current assessment and new philosophy of business.

We, All India Federation of Tax Practitioners, were alive to the above Summit deliberations and the responses thereto of the distinguished personalities including Noble Prize winning economist, thinker, writer Mr. Paul Krugman of the U.S.A.

In brief, following are the highlights of the Summit:

Maximum governance: Hon’ble Prime Minister said – “I have often called for Minimum Government, Maximum Governance. This is not a slogan. This is an important principle to transform India. Government systems suffer from two weaknesses. They are complex. And they are slow.

In life, people go on a ‘Chaar Dham Yatra’ to get ‘Moksha’. In Government, a file has to go to ‘Chattees Dham’ and yet not get ‘Moksha’!

We need to change this. Our systems need to be made sharp, effective, fast and flexible. This requires simplification of processes and having trust in citizens. This needs a policy-driven State.

What is Maximum Governance, Minimum Government? It means Government has no business to be in business. There are many parts of the economy where the private sector will do better and deliver better. In 20 years of liberalisation, we have not changed a command-and-control-mind set. We think it is okay for Government to meddle in the working of firms. This must change. But this is not a call for anarchy.

Why do we need the State? There are five main components:

  1. The first is public good such as defence, police and judiciary;

  2. The second is externalities which hurt others, such as pollution. For this, we need a regulatory systems;

  3. The third is market power, where monopolies need controls;

  4. The forth is information gaps, where you need someone to ensure that medicines are genuine and so on;

  5. Last, we need a well designed welfare and subsidy mechanism to ensure that the bottom of the society is protected from deprivation. This specially includes education and health care.

We arrived at consensus with States for amending the Constitution to implement GST which is a major breakthrough. GST has been pending for over a decade. This alone has the potential to make India competitive and attractive for investment.”

Digital India: “Digital India will reform government systems, eliminate waste, increase access and empower citizens. It will drive the next wave of growth, which will be knowledge-driven. Broadband in every village, with a vide range of online services, will transform India in a manner we cannot foresee.” said Mr. Modi.

• In response, among other distinguished speakers, Mr. Narayana Murthy, Infosys Co-founder, responded saying the speech was very inspirational. He (Modi) addressed the basic problem of creating prosperity. And that is about reducing friction in doing business. We had gone to sleep for a long time and just awoke. A sleepy mind takes time to wake-up…… we are seeing signs of country awakening. He further said – “along with reducing friction for business, the Government has to collect as much tax as possible by introducing a system that is easy to understand, easy to comply with, corruption free and is based on rules that are fair.” Additionally, he said: “the future of this country depends on improving our higher education systems and creating a platform for the exchange of views.”

In the context of the above Summit and background as outlined above, it is necessary for us as a National body of tax practitioners, to do our hard work in the matter of representing the problems of the profession and to have a continuous dialogue with the concerned Government authorities including the PMO, to serve not only our clients but people at large who pay direct and indirect taxes honestly for the growth of the country, but they hardly get any returns. Hence, the spending of the taxes by the authorities are required to be monitored should also be our social responsibility towards people in general.

Members and readers of the journal are therefore requested to respond to this piece of writing!

D.H. Joshi, Associate Editor

Issues regarding Service Tax on Real Estate Transactions

Builders and developers are deemed to be service providers in respect of under construction units/flats and are made liable to service tax w.e.f. 1-7-2010 in respect of consideration received from the buyers against such construction of flats/units. Sale of under construction flats/units is liable to service tax only where any part of sale consideration was received by the builder or his authorised agent before the grant of completion certificate. Where full consideration is received by the builder or his authorised agent after grant of completion certificate it is a pure transaction of sale of immovable property and is not liable to service tax. Construction of residential complex under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Gandhi Awas Yojana etc. is exempt from service tax. So also houses up to 60 sq. mtrs. built for urban poor is not liable to tax.

Some issues in relation to service tax on Real Estate Transaction are clarified as under questions.

Q-1 Whether levy of service tax on real estate is Constitutionally valid?

Ans. The Hon’ble Bombay High Court in case of the
Maharashtra Chamber of Housing Industries and Other vs. Union of India has upheld the Constitutional validity of levy of service tax of similar construction service provided by builder.

Q-2 Whether sale of land is chargeable to service tax?

Ans. Sale of land by the land owner to the prospective buyer is not service much less a taxable service, hence such activity is not chargeable to service tax. (Refer Circular No. 151/2 of 2012-ST dated 10-2-2012).

Q-3 Where the land owner has allowed builder/developer to construct flats on the land belonging to him and against that has agreed to accept two flats/units to be constructed on this land, is there any taxable service rendered by the builder/developer to the land owner? If yes, what will be the value of taxable services?

Ans. The builder/developer is providing service to land owner for construction of two flats. If any part of the payment/development rights of the land is received by the builder/developer before the issuance of completion certificate, service tax is required to be paid by the builder/developer on the flats given to the land owner. However, if as per the agreement of the flats/units is to be transferred after completion certificate is received from the competent authority and if there is no performance as per agreement before that then it would not be service and no tax would be payable. In case it is held that it is taxable service then the value is required to be calculated in terms of Section 67(1)(iii) read with Rule 3(a) of Service tax (Determination of Value) Rules, 2006. As the consideration of the flats etc. i.e. value of land/development rights in the land may not be ascertainable the value of the flats be taken equal to the value of similar flats to other buyers sold nearer to the date on which land is made available for construction.

Q-4 Whether a sub-contractor doing a part of the work contract is liable to tax if the service of the main contractor is not liable to tax?

Ans. No, a sub-contractor providing services by way of works-contract to the main contractor is exempt from tax if the main contractor is providing exempt service (Ref. 29(h) of mega exemption Notification No. 25 of 2012).

Q-5 Whether a sub-contractor doing pure labour job for a main contractor whose services are exempt from Service tax?

Ans. No. The exemption to the services rendered by a sub-contractor is limited only to the service by way of works contract. Pure labour work is not a works contract. Hence sub-contractor will not be exempt from service tax under entry 29(h) of mega exemption Notification No. 25 of 2012.

Q-6 Whether an architect service and/or consulting engineer services provided to a contractor who is executing a construction work which is exempt from tax, is also exempt from tax?

Ans. No. Such services will not be exempt. As per clause (1) of section 66F reference to a service by nature or description in the Act will not include reference to a service used for providing such service. Therefore, such architect & consulting engineer will be liable to pay tax.

Q-7 Whether abatement of 70% or 75% can be claimed by a provider of residential complex service where there are two separate agreements, one for sale of undivided share of land & the other for super structure?

Ans. Yes. Since the intention of the parties is to avail the service of construction of a complex etc. i.e. buy & sell as unit/flat with an undivided share in land, the abatement will be available. However, the value as per both the agreements will be aggregated and then the abatement percentage of 70% or 75% is to be applied.

Q-8 A builder has offered a flat for Rs. 95 lakhs whose super built-up area is 2050 sq.ft., whether abatement @70% will be allowed or 75%?

Ans. Since the super built-up of the flat is up to 2050 sq.ft., carpet area is always being lesser than super built up area by around 20% to 25% in this case carpet area will work out lesser than 2000 sq. ft. Thus, the abatement of 75% is admissible and service tax will be chargeable only on 25% of the value.

Q-9 Whether a builder/promoter availing abatement of 70% or 75% can claim input tax credit in respect of inputs and/or services?

Ans. A builder/provider availing abatement cannot claim input tax credit in respect of duty paid on input goods. However he can claim input tax credit of tax paid on input services and capital goods.

Q-10 Whether repairs, maintenance of Airport, Ports and Railways are liable to service tax?

Ans. Services by way of construction, erection, commissioning or installation of original work pertaining to airport, port or railway, including Mono rail or Metro is exempt tax. Since the repairs and maintenance of airport, port and railway cannot be said to be an original work, the same will be liable for service tax. This position has been clarified by CBEC vide para 7.9.8 of the Education Guide on Service tax.

Q-11 Whether painting contract awarded by an owner of one of the units in a residential complex on the occasion of Diwali will be exempt from service tax?

Ans. No. As the services only by way of construction, erection, commissioning or installation of original work pertaining to a single residential unit are exempt from tax, the repairs is not covered by exemption the tax will have to be paid on such services.

Q-12 Whether painting contract given by a Government Hospital is liable to service tax?

Ans. No. Services provided to Government, a local authority or a Government Authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of a civil structure or any other original work meant predominantly for use other than for commerce ,industry or any other business, profession is exempt from tax. However, the cold storage is not infrastructure for agricultural produce position may change on facts.

Q-13 Whether construction of building used as cold storage is liable to tax?

Ans. No. Construction of a building used as a cold storage is not liable to tax as services by way of construction, erection, commissioning or installation of original works pertaining to post harvest storage infrastructure for agricultural produce including a cold storage for such purpose is exempt from tax (by value of Entry No.14(h) of mega exemption Notification No. 25/2012).

Q-14 Where a
builder/developer has decided to give cement, steel etc. free of
cost to the contractor engaged in constructing the flats in order to
ensure quality of material, can the value of such material be
included in the value of taxable service?

Ans. The Larger Bench of CESTAT in the case of Bhayana Builders (P) Ltd., & others, held that value of goods supplied free of cost by a service recipient to the provider of service is neither monetary nor a non-monetary consideration paid by or coming from the service recipient accruing to the benefit of the service provider and therefore would be outside the taxable value.

Q-15 Construction of flat in a complex involves transfer of property in goods also, hence can be considered as works contract. Whether the assessee should opt to pay service tax by treating the service as works contract or tax be paid as construction of complex service?

Ans. “Works contract’ is a general term & includes many more transactions where both service & goods are involved, whereas ‘construction of complex service’ is a special term, a specified works contract. A special entry prevails over general entry, hence such activity is to be classified as ‘construction of complex service’. Further in case of residential complex, service tax is payable only on 25% or 30% of the total consideration. Whereas in case of works contract, service tax is payable on 40% of the total consideration. Therefore, also (unless land value is very high) it is beneficial to pay tax under the category of ‘construction of complex service’.

Q-16 Whether service tax is applicable on Transfer of Development Rights (TDR)?

Ans. As per section 65B(44) of Finance Act, 1994 “Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—

a) an activity which constitutes ‘merely’,––

a ‘transfer of ‘title’ in goods or immovable property, by way of sale, gift or in any other manner; or

TDR is sale. The activity of permanent and irrevocable sale of development rights is a mere transfer of title of immovable property by way of sale and hence shall be outside the purview of service tax.

Q-17 Whether service tax can be paid at abatement rate in case of Preferential Location Charge (PLC) collected from buyers?

Ans. If consideration in respect of these charges is not charged separately and is clubbed as total consideration, abatement of 70% or 75% of the gross amount charged will be available. However, if consideration is charged separately full amount charged on account of PLC is taxable No abatement will be available as while rendering Preferential Location Services there is no transfer of material from the service provider to the service recipient. Abatement in Service Tax is granted only in respect of such services where there is transfer of materials also.

Q-18 What ‘carpet area’ as mentioned in Notification No. 26/2012-ST dated 20-6-2012, in order to claim abatement for construction for residential complex?

Ans. The word ‘carpet area’ is not defined in the Finance Act, 1994. The word “carpet area” is mentioned under N.B.C., B.I.S Codes and under the Building Bye Laws. Only BIS Code IS 3861 of 2002 (Reaffirmed in 2007) gives “Method of measurement of plinth, carpet and Rentable areas of buildings”.

As per this code “carpet area” shall mean “the floor area of the usable rooms at any floor level”. As per Section 5 of the code “measurement of carpet area” shall be the plinth area less thickness of wall (inclusive of finishes). Further as per section 5.2 of the Code, the carpet area shall be the area worked out as in 5.1 excluding the area of the verandah, corridor or passage, entrance hall & porch, staircase & stair cover, shaft and machine room of lift, bathroom and lavatory, kitchen & pantry, store, canteen, air conditioning duct & plant room and shaft for sanitary/water supply installations & garbage chute, electrical & fire fighting, air conditioning, telecommunication, lift.

Besides this, areas of floors without cladding (stilted floor), garages, stair cover (mumty), machine room, towers, torrents, domes projecting above the terrace level at terrace are not to be accounted for while working out carpet area of a building.

As B.I.S. code is statutory in nature and gives a comprehensive method of calculating carpet and plinth areas of buildings, it may be followed in absence of any other specific definition.

The Real Estate (Regulation & Development) Bill 2011 defines “carpet area”: to mean the net usable floor area of an immovable property, excluding the area covered by the walls and the common areas.

Hence, in the absence of definition of “carpet area” in the Finance Act, 1994, the aforementioned method will apply for determining the carpet area.

Q-19 In case of reverse charge mechanism, whether service provider and service receiver can follow different valuation methods?

Ans. As clarified in para 10.1.3 of the Education Guide issued by the CBEC, the liability of the service provider and service recipient are different and independent of each other.

In this regard Explanation II of the Notification No. 30/2012-ST, dated 20-6-2012 provides that in works contract services, where both service provider and service recipient is the person liable to pay tax, the service recipient has the option of choosing the valuation method as per choice, independent of valuation method adopted by the provider of service.

Q-20 Works contract allotted on ‘inclusive of service tax’ basis, liability of service recipient to pay service tax under reverse charge mechanism?

Ans. Payment of service tax under reverse charge mechanism is required to be made in terms of sub-section (2) of section 68 of the Act read with Notification No. 30/2012 ST dated 20-6-2012. The liability of both service provider as well as service receiver is separate and independent. There is no exception under the law for works contract allotted to service provider on ‘inclusive of service tax’ basis.

The contractual understanding between service provider and service recipient that the contract is ‘inclusive of service tax’ does not prevail over statutory provisions. Hence the service recipient is liable to pay service tax even in case of a contract allotted on reverse charge mechanism.

CA Ashok Chandak

Purchase of ‘C’ form

Q. The dealer is engaged in job work. Dealer receives goods from other parties, which are processed and returned back by the dealer. Whether such job work dealer can purchase goods like machinery etc., on ‘C’ form?


The eligibility to purchase goods against ‘C’ form is provided in section 8(3)(b) of the CST Act, 1956. The said section is reproduced below for ready reference.

“S. 8. Rates of tax on sales in the course of inter-State trade or commerce. –

(3)(b) are goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for re-sale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing of goods for sale or in telecommunications network or in mining or in generation or distribution of electricity or any other form of power.”

Therefore, as per the first recital, the goods intended for use in manufacturing or processing of goods for sale can be purchased against ‘C’ form. There is no condition that such manufactured or processed goods should be sold by the purchaser himself. Therefore, if the goods processed by the job worker are to be sold by the original owner for whom the job work is done, then job worker can purchase the goods against ‘C’ form. However, if the owner is not going to sell the processed goods supplied by job worker as it is but going to use them in further manufacturing and then such manufactured goods are intended to be sold then job worker cannot purchase the goods against ‘C’ form. This position is clear from landmark judgment of Hon’ble Supreme Court in case of
Assessing Authority-cum-Excise and Taxation Officer, Gurgaon and Another V. East India Cotton Mfg. Co. Ltd. (48 STC 239) (SC). Hon’ble Supreme Court has observed as under:

“The question which therefore arises for consideration is as to what is the scope and meaning of the expression “for use………in the manufacture………of goods for sale” occurring in section 8(3)(b) and in the declaration in Form C and rule 13. Does it mean that the goods manufactured by a registered dealer by using the goods purchased against his certificate of registration and the declaration in Form C must be intended for sale by him or does it also include a case where goods are manufactured by a registered dealer for a third party under a job-contract and the manufactured goods are intended for sale by such third party? Now it is a well-settled rule of interpretation that a statute must be construed according to its plain language and neither should anything be added nor subtracted unless there are adequate grounds to justify the inference that the legislature clearly so intended. It was said more than seven decades ago by Lord Mersey in
Thompson v. Goold and Company(1):

“It is a strong thing to read into an Act of Parliament words which are not there, and in the absence of clear necessity it is a wrong thing to do.”

Lord Loreburn, L.C., also observed in
Vickers, Sons and Maxim Limited v. Evans(2):

“We are not entitled to read words into an Act of Parliament unless clear reason for it is to be found within the four corners of the Act itself.”

Now here we find that the expression used by the legislature as also the rule making authority is
simpliciter “for use…… the manufacture…….of goods for sale” without any addition of words indicating that the sale must be by any particular individual. The legislature has designedly abstained from using any words of limitation indicating that the sale should be by the registered dealer manufacturing the goods. It is significant to note that where the legislature wanted to restrict the sale to one by the registered dealer himself, the legislature used the qualifying words “by him” after the words “for resale” in the first sub-clause of section 8(3)(b) indicating clearly that the resale contemplated by that provision is resale by the registered dealer purchasing the goods and by no one else, but while enacting the second sub-clause of section 8(3)(b) the legislature did not qualify the words “for sale” by adding the words “by him”. This deliberate omission of the words “by him” after the words “for sale” clearly indicates that the legislature did not intend that the sale of the manufactured goods should be restricted to the registered dealer manufacturing the goods. If the legislature intended that the sale of the manufactured goods should be by the registered dealer manufacturing the goods and by no one else, there is no reason why the words “by him” should have been omitted after the words “for sale” when the legislature considered it necessary to introduce those words after the words “for resale” in the first sub-clause of section 8(3)(b). The omission of the words “by him” is clearly deliberate and intentional and it cannot be explained away on any reasonable hypothesis except that the legislature did not intend that the sale should be limited to that by the registered dealer manufacturing the goods. The court must construe the language of section 8(3)(b) according to its plain words and it cannot write in the section words which are not there. To read the words “by him” after the words “for sale” in section 8(3)(b) would not be construction but judicial paraphrase which is impermissible to the court. It is also important to note that the word “use” is followed by the words “by him” clearly indicating that the use of the goods purchased in the manufacture of goods for sale must be by the registered dealer himself but these words are significantly absent after the words “for sale”. On a plain grammatical construction these words govern and qualify only “use” and cannot be projected into the words “for sale”. The goods purchased by the registered dealer must be used by him in the manufacture of goods which are intended for sale but such sale need not be by the registered dealer himself; it may be by anyone.

Now ordinarily when the language of a statutory provision is plain and unambiguous, there is no need to resort to the object and purpose of the enactment because, in such a case, the language best declares the intention of the law-giver. But, even if we look at the object and intendment of section 8(1)(b) read with section 8(3)(b), we reach the same conclusion. The object of providing a lower rate of tax under section 8(1)(b) for sales of goods described in section 8(3)(b) clearly is that when goods are purchased by a registered dealer for being used by him in the manufacture or processing of goods which are intended for sale, the goods which are ultimately sold should not become unduly expensive to the consumer by addition of a high rate of sales tax on the purchase of goods which are used in the manufacture or processing of the goods ultimately sold. Now if this be the object of section 8(1)(b) read with section 8(3)(b) it should be immaterial whether the sale of the manufactured or processed goods is by the registered dealer manufacturing or processing goods or by another person for whom the goods are manufactured or processed by the registered dealer. The intendment of the statutory provision being that the cost of the manufactured or processed goods to the consumer should not be unduly enhanced by reason of higher rate of tax on the goods used in the manufacture or processing of the goods sold, it is obvious that if this intendment is to be fully effectuated, the benefit of the statutory provision should be available irrespective of whether the manufactured or processed goods are sold to the consumer by the registered dealer or by some one else who has got the same manufactured by the registered dealer. It was for this reason that the legislature deliberately omitted to add the words “by him” after the words “for sale” so as to make it clear that this sub-clause of section 8(3)(b) would apply even if the goods manufactured or processed by the registered dealer were intended for sale by someone else. The words “for sale” following upon the word “goods” clearly indicate that the goods manufactured or processed by the registered dealer must be goods for sale or, in other words, they must be goods intended for sale, and it is immaterial whether they are intended for sale by the registered dealer himself or by anyone else.

This sub-clause of section 8(3)(b) would therefore clearly cover a case where a registered dealer manufactures or processes goods for a third party on a job-contract and uses in the manufacture or processing of such goods, materials purchased by him against his certificate of registration and the declarations in Form C, so long as the manufactured or processed goods are intended for sale by such third party. It is, of course, true that if the proceedings are taken against the registered dealer under section 10, clause (d), or section 10A, the question would arise whether the goods manufactured or processed by the registered dealer for a third party were intended for sale by such third party and that would have to be decided by the court or the competent authority according to the appropriate and relevant rules of evidence, but merely because some difficulties may arise in the determination of this question by reason of the third party coming into the picture that would be no ground for refusing to place on the language of section 8(3)(b) the only construction which it can reasonably bear.”

Thus, the legal position is clear that the processed goods need not be sold by the processor itself and therefore, even if the processing is on job work basis, still the ‘C’ form can be used. However, it should be ensured and sufficient evidence should be kept that the processed goods supplied by job worker themselves are sold by the original owner.

C. B. Thakar, B.Com., L.L.B.F.C.A., Advocate

Query No. 1 (Exemption u/s. 54F)

A flat was sold. The AO adopted stamp duty value. The assessee invested full stamp duty value in another flat. Whether the assessee is entitled for deduction under section 54F?


The Karnatka High Court in Gauli Mahadevappa v. ITO [356 ITR 90]
has held that where capital gain is assessed on notional basis under section 50C, whatever amount is invested in new residential house within prescribed period under section 54F would get benefit of deduction irrespective of the fact that funds from other sources are utilised for new residential house.

Further, in Raj Babbar v. ITO [56 SOT 1], the Mumbai Tribunal has held that if investment in new asset was more than net consideration received as well as full value of consideration computed as per section 50C, the assessee would be entitled for deduction.

On the basis of above decisions, the assessees is entitled for the amount invested in another flat under section 54F of the Act.

Query No. 2 (TDS not paid by deductor)

A demand has been raised on ‘X’ for the short credit in 26AS in respect of TDS deducted by the deductor but not paid to the Government. Whether ‘X’ is liable to pay the demand.


Section 205 of the Income-tax Act, 1961 provides that in case tax is deductible at source under chapter XVII of the Act, the assessee shall not be called upon to pay the tax himself to the extent of the deduction so made irrespective of the fact whether the tax so deducted has been actually deposited with the Government by the payer.

The Karnataka High Court in
Smt. Anusuya Alva v. SCIT [278 ITR 206] has held that once deduction was made, the revenue was expected to look to the person who had deducted the tax for realising the amount, if such person failed to remit the amount to the Central Government, the consequence shall fall only on the Revenue and cannot be forced on the assessee. The deduction was under the statutory obligation and on behalf of the Revenue. Section 205 provides a protection to the assessee and to prevent the Revenue from embarking on the recovery proceedings in respect of such amount. The word “deduct” accruing in the said section can not be understood “deducted and remitted”. Even on the general principles of law, the law of principal and agent, for a default of the agent of the Revenue, the assessee who was third party in relation to such relationship could not be penalised. The only course open to the Revenue was to recover the amount from the very person who had deducted and not from the assessee.

In Yashpal Sahani v. Rekha Hajarnavis ACIT [293 ITR 539] the Bombay High Court, further held that complete machinery is provided under the Act for recovery of TDS from the person who has deducted such tax at source and the Revenue was barred from recovery of the amount from the person from whose income tax has been deducted at source.

Query No. 3 (Can legal heir claim exemption u/s. 54)

The assessee sold residential house and planned to construct a new house for claiming exemption u/s. 54. The assessee expired in April, 2014. Can legal heir who has to file Return of Income can claim benefit u/s. 54 of the Act, and how?


This point has been decided by the Madras High Court in C.V. Ramanathan v. CIT [125 ITR 191], wherein the Court held that one of the concessions provided for persons deriving capital gains under the Income-tax Act is that where a person sells property used for his residence and substitutes another its place, then any capital gain derived by him would not be liable to assessment so long as the entire capital gain is reinvested in the newly acquired property. Section 54 of the Act, which gives the concession contemplates later events, i.e. substitution of property within one or two years to be taken into account. Hence, it is important to see if this condition is satisfied .

The legal representative cannot be differentiated from the assessee for this purpose. If the assessee were liable to pay capital gains tax, the benefit of section 54 which forms part of the scheme of taxation of capital gains cannot be denied because the latter condition of section 54 was fulfilled by his legal representative.

Similarly, in Late Mir Gulam Ali Khan v. CIT [165 ITR 228], the Andhra Pradesh High Court has held that the object of granting exemption under section 54 of the Act, is that a person who sells a residential house for the purpose of purchasing another convenient house must be given exemption so far as capital gains are concerned. The word ‘assessee’ in section 54 must be given wide and liberal interpretation so as to include his legal heirs also. There is no warrant for giving the strict interpretation to the word “assessee” as that would frustrate the object of granting exemption.

Thus, it is clear from the above judgments that legal heir steps in the shoes of deceased and entitled for deduction under section 54 of the Act.

Query No. 4 (Capital gains – Short-term or Long-term)

‘A’ has purchased a plot in March, 2010 for Rs. 10/- lakh and spent Rs. 5/- lakh for construction during F.Y. 2011-12, and Rs. 5/- lakh during the F. Y. 2012-13. He sold the entire house in December, 2014 for Rs. 50 /- lakh Whether it is long-term or short-term gain?


Section 2(29A) defines “Long term capital asset” which means a capital asset which is not a short term capital asset. Section 2 (42A) defines “Short term capital asset” which means a capital asset held by an assessee for not more than thirty six months, other than listed shares. In that case, a period of not more than the twelve months to be considered for short term capital asset.

Now, in this case land was for more than thirty six months, hence the same is to be considered as long term capital asset. While super structure was for less than thirty six months, so it is to be considered as short term capital asset.

Therefore, the land would be assessed as long term capital gains, while super structure would be assessed as short term capital gains, on the basis of following judgments:

i) CIT v. Citibank N.A. [261 ITR 570 (Bom)]

ii) CIT v. Dr. D. L. Ramchandra Rao [236 ITR 51 (Mad)] and

iii) CIT v. Vimal Chand Golecha [201 ITR 443 (Raj)].

Query No. 5 (Whether transfer is complete)

‘P’ had to sold her property in order to finance her daughter’s medical expenses.

The agreement for sale was entered for Rs. 50/- lakh. She received only Rs. 35/- lakh due to dispute with the buyer. No possession of the property was given. She does not have money to invest in order to claim exemption u/s. 54. The AO passed the order levying tax on Rs. 50/- lakh. Whether AO is right?


In this case transfer is not complete, because of property has not been given and therefore there is no question of investing in another house to claim exemption under section 54.

In Chaturbhuj Dwarkadas Kapadia v. CIT [260 ITR 491] the Bombay High Court has held that clauses (v) and (vi) were introduced in section 2(47) of the Income-tax Act, 1961 with effect from April 1,1988. They provide that transfer includes (i) any transaction which allows possession to be taken/retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1982 and (ii) any transaction entered into in any manner which has the effect of transferring or enabling the enjoyment of any immovable property. Till then, no liability to capital gains arise.

The Bombay High Court reiterated the aforesaid view in
CIT v. Geetadevi Pasari [17 DTR (Bom) 280]. The Court held that the relevant assessment year for the purpose of computation of capital gains will be the assessment year in which the assessee was actually put in possession.

Thus, on the basis of above judgments it is clear that AO is not right in levying tax on Rs. 50/- lakh.

Note: Please send your queries relating to Direct, Indirect & International taxation, Accounting & Auditing Standards and Company Law, FEMA etc. to AIFTP, having interest to the Members.

CA. H.N. Motiwalla

Agency commission

  • Payment of agency commission –
    Certification of claims by external auditors RBI/2014-15/ 394 DGBA.GAD. No. H-2995/ 31.12.010/2014-15 dated January 7, 2015.

As per our circular DGBA.GAD.No.2528/31.12.010 (C)/2012-13 dated October 31, 2012 prescribing the format for certification of agency commission claims by external auditors (Chartered Accountants). The certificate to be furnished by the auditors has since been slightly amended and should be henceforth be accompanied by a certificate as per the revised format as prescribed.

External Commercial Borrowings (ECB)

  • Security for External Commercial Borrowings dated Jan. 1, 2015 [S. 10(4) & 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999)] RBI/2014-15/377 A.P. (DIR Series) Circular No. 55].

The circular is in relating to creation of charge over securities for External Commercial Borrowings (ECB) of Authorised Dealers Category–I (AD Category-I). AD Category-I banks may allow creation of charge on immovable assets, movable assets, financial securities and issue of corporate and/or personal guarantees in favour of overseas lender/security trustee, to secure the ECB to be raised/raised by the borrower, subject to:

  1. The underlying ECB is in compliance with the extant ECB guidelines,


  2. There exists a security clause in the Loan Agreement requiring the ECB borrower to create charge, in favour of overseas lender/security trustee, on immovable assets/movable assets/financial securities/ issuance of corporate and / or personal guarantee, and (iii) No objection certificate, wherever necessary, from the existing lenders in India has been obtained. After satisfying the aforesaid stipulations are met, the AD Category-I bank permit creation of charge on immovable assets, movable assets, financial securities and issue of corporate and/or personal guarantees, during the currency of the ECB with security co-terminating with underlying ECB.

Foreign Accounts Tax Compliance Act (FATCA)

  • Inter-Governmental Agreement (IGA) with United States of America (US) under Foreign Accounts Tax Compliance Act (FATCA) – Registration for Non-Bank Financial Companies Circular RBI/2014-15/397DNBR.CC.PD.No.010/03.10.01/2014-15 dated January 9, 2015.

In refer to circulars DNBS (PD).CC.No 401/03.10.42/2014-15 dated July 25, 2014 and DBR.AML.No. 9644/14.07.018/2014-15 dated December 30, 2014 the Government of India, has now advised to avoid withholding tax, Foreign Financial Institutions (FFIs) in Model 1 jurisdictions, such as India, need to register with IRS and obtain a Global Intermediary Identification Number (GIIN) before January 1, 2015. The FFIs who have registered but have not obtained a GIIN should indicate to the withholding agents that the GIIN is applied for, which may be verified by the withholding agents in 90 days.

  • Inter-Governmental Agreement (IGA) with United States of America (US) under Foreign Accounts Tax Compliance Act (FATCA) – Registration for SCB/RRBs/ Local Area Bank/ All Financial Banks dtd. December 30, 2014. Circular No. RBI/2014-15/372DBR. AML. No. 9644/14.07.018/2014-1

In reference to the earlier circular DBOD. AML. No. 20472 /14.07.018/2013-14 dated June 27, 2014, the Government of India, has now advised to avoid withholding tax, Foreign Financial Institutions (FFIs) in Model 1 jurisdictions, such as India, need to register with IRS and obtain a Global Intermediary Identification Number (GIIN) before January 1, 2015. The FFIs who have registered but have not obtained a GIIN should indicate to the withholding agents that the GIIN is applied for, which may be verified by the withholding agents in 90 days.

Large Value Frauds

  • Monitoring of Large Value Frauds by the Board of Directors RBI/2014-15/393 DCBR.BPD PCB Cir. No. 10/12.05.001/2014-15 dtd. January 7, 2015.

As per circular UBD. No. Plan. (PCB) 9/09.06.00-94/95 dated July 25,1994 advising all UCBs to constitute an apex level Audit Committee of Board (ACB) may consist of the Chairman and three/four directors, one or more such directors being Chartered Accountants or having experience in management, finance, accounting and audit systems etc. The ACB is required to oversee the internal inspection, statutory audit, inter branch/inter-bank accounts, balancing of books, major areas of house-keeping, etc. The Committee is also required to focus attention on preventive aspects as well as follow up action on frauds like detection, reporting to regulatory and enforcement agencies and action against the perpetrators of the frauds. The Boards of banks should constitute a Special Committee for monitoring and following up cases of frauds involving amounts of Rs. 1 crore and above exclusively, while ACB may continue to monitor all the cases of frauds in general.

Money Laundering: Client due Diligence

  • Obligation of NBFCs under Prevention of Money Laundering Act, 2002 – Client Due Diligence measures dtd. Jan. 2, 2015 Circular No. RBI/2014-15/383DNBR(PD).CC.No. 009/03.10.42/2014-15

In reference to Master Circular DNBS(PD) CC.No.387/03.10.42/ 2014-15 dated July 1, 2014, NBFCs are required to undertake ‘Client Due Diligence’ and apply measures to existing clients based on risk categorisation. A fresh KYC documents need to be submitted at the regular intervals. The periodicity of such updation should not be less than once in five years in the case of low risk category customers and not less than once in two years in case of high and medium risk categories. Full KYC exercise will be required to be done at least every two years for high risk individuals and entities and at least every ten years for low risk and at least every eight years for medium risk individuals and entities. If an existing KYC compliant customer of NBFC desires to open another account in the same NBFC, there should be no need for submission of fresh proof of identity and/or proof of address for the purpose.

Source: Reserve Bank of India

Non-co-operative borrowers

  • Non-Cooperative Borrowers dated December 22, 2014 Circular No. RBI/2014-15/362DBR. No. CID.BC.54/20.16.064/2014-15

As per circular DBOD.BP.BC. No. 97/21.04.132/2013-14 dated February 26, 2014 on ‘Framework for Revitalising Distressed Assets in the Economy – Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP)’ which inter alia, provides for specific prudential measures and reporting requirements in respect of Non-Co-operative Borrowers. The definition of a Non-Co-operative Borrower as contained therein is hereby modified to read as under:

A non-co-operative borrower is one who does not engage constructively with his lender by defaulting in timely repayment of dues while having ability to pay, thwarting lenders’ efforts for recovery of their dues by not providing necessary information sought, denying access to assets financed/collateral securities, obstructing sale of securities, etc. In effect, a non-co-operative borrower is a defaulter who deliberately stone walls legitimate efforts of the lenders to recover their dues.

Further the banks/FIs should take the measures in classifying/declassifying a borrower as non-co-operative borrower and reporting information on such borrowers to Central Repository of Information on Large Credits (CRILC).

Non-Resident Guarantee for Non-Fund Facilities

  • Non-resident guarantee for non-fund based facilities entered between two resident entities S. 10(4) & S. 11(1) of FEMA Act, 1999 (42 of 1999) RBI/2014-15/387A.P. (DIR Series) Circular No. 56 dated. January 6, 2015

A non-resident guarantee for non-funded facilities such as Letters of Credit/guarantees/Letters of Undertaking (LoU) /Letter of Comfort (LoC) entered between two persons resident in India is allowed under the general permission route. Further, the residents that are subsidiaries of multinational companies can also hedge their foreign currency exposure through permissible derivative contracts executed with an AD Category–I bank in India on the strength of guarantee of its non-resident group entity, which should be complied as per A. P. (DIR Series) Circular No. 20 dated August 29, 2012.

Representative of Foreign Banks

  • Revised format of reporting –Representative Offices of Foreign Banks in India dated December 31, 2014 RBI/2014-15/374 DBR.IBD.No. 9745/23.13.001/2014-15

Representative Offices of foreign banks in India are currently required to submit /documents on an annual basis to Reserve Bank of India as under:

  1. A certificate from the auditor to the effect that during the year no income was earned by/accrued to the office in India,

  2. Certified copy of the audited final accounts of the office in India,

  3. Details of remittances received from abroad duly supported by bank certificates and

  4. An annual report of the work done by the office in India.

Wilful Defaulter

  • Master Circular on Wilful Defaulter RBI/2014-15/73DBR.No.CID.BC.57 /20.16.003/2014-15 (dated July 1, 2014 updated January 7, 2015)

RBI examined and modified Master Circular on Wilful defaulters guidelines are definitional and clarificatory in nature, certain substantive changes have been made to bring in greater transparency and accountability in the due process required to be adopted for identification of Wilful Defaulters. Further, in view of the limited role of non-promoter/non-whole time directors (Nominee and Independent directors) in the management of a company’s debt contracts, their names shall now be excluded from the list of Wilful Defaulters, except in the rarest circumstances which also have been specified. The copy of the updated circular can be found in the link below:

Sujeet Karkala, Advocate

1. Value Added Tax on the sale of goods is being levied by every State in India vide separate enactment called Value Added Tax Act. The Parliament introduced the levy of Service Tax in 1994 under Chapter V of the Finance Act, 1994. As there is no separate enactment for the levy of Service Tax, the term ‘Service Tax Act’ is used in this write up for convenience. Similarly the term ‘contractor’ is used for works contractor as well as for service provider.

2. The Supreme Court of India in the case of Larsen & Toubro Ltd. (hereinafter mentioned as L & T) reported in 65 VST 1 held that a single contract may cover deemed sale of goods as well as rendering of service. Therefore, once again the question is, whether the contractor is liable to pay VAT as well as Service Tax on the consideration received for the same contract? If the answer is in the affirmative, then it would amount to double taxation or as the case may be overlapping in VAT and Service Tax. The Courts have taken the view that where the tax is levied by two different Governments it is not double taxation.

3. As far as the contractors are concerned they will continue to expect and that is logical as well, that even small portion of the same consideration should not be taxed twice i.e. under VAT Act as well as under Service Tax Act. Though both the enactments provides deductions/abetment for the consideration received for another, there is no machinery in both these enactments to assure that the portion of the consideration taxed under VAT Act will not be taxed under Service Tax Act or vice versa. The power to determine the ‘taxable amount’ out of total consideration, for the purpose of levy of VAT and Service Tax is conferred respectively on the Legislature of a relevant State and on the Parliament. The provision to determine the ‘taxable amount’ is so made under both the enactments, that same portion of the consideration is being taxed under VAT Act as well as under Service Tax Act. Even after deducting the abatements offered under the respective enactment, the consideration taxed under both the enactments is more than what is actually received by the contractor. This for all practical purposes amounts to overlapping in Service Tax and VAT.

4. In Para 92 of L & T’s case it is observed
“It seems to us (and that is the view taken in some of the decisions) that a contract may involve both a contract of work and labour and a contract of sale of goods. In our opinion, the distinction between contract for sale of goods and contract for work (or service) has almost diminished in the matters of composite contract involving both (a contract of work/labour and a contract for sale for the purposes of Article 366(29-A)(b). Now by legal fiction under Article 366(29-A)(b), it is permissible to make such contract divisible by separating the transfer of property in goods as goods or in some other form from the contract of work and labour. A transfer of property in goods under clause 29(A)(b) of Article 366 is deemed to be a sale of goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. For this reason, the traditional decisions which hold that the substance of the contract must be seen have lost their significance. What was viewed traditionally has to be now understood in light of the philosophy of Article 366(29-A)”.

5. In view of the aforesaid observations of Supreme Court, all the judgments prior to L & T, will have to be analysed from new angle. The dictionary meaning of the word ‘overlap’ is “to occupy the same area in part” or “to have parts that are the same as parts of something else”. Therefore while working out the sale price for the purpose of vat, if the price for services is also included in it, it would amount to overlapping in vat.

6. Although in the case of L & T, the Supreme Court was concerned with the levy of vat on developers, its observations in Para 115 will lead to controversy regarding the value to be determined for vat and service tax both. It is observed
“the activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser.” Therefore the question is as to whether prior to aforesaid stage, was it a ‘works contract service’? If it is not, then even service tax cannot be levied prior to aforesaid stage, on the consideration received till the aforesaid stage.

7. In view of the aforesaid controversy, the litigation regarding the ‘taxable amount’ under VAT Act has already commenced
vide four Writ Petitions filed in the Bombay High Court by the Association of Builders and Others. Now the litigation regarding the ‘taxable amount’ under Service Tax Act may commence on the ground that the consideration pertaining to construction prior to the stage the developer enters into a contract with the flat purchaser, cannot be made liable to service tax. Looking to newly amended Rule 58 under the Maharashtra Valued Tax Act the key point for determination of sale price (taxable amount), may be of enforceability. Though in past the courts have taken the view that the enforceability test is not determinative or hurdle in levy of VAT or Service tax, in view of criteria laid down by the Supreme Court in L & T’s case, the courts are expected to entertain the issue of working out the ‘taxable amount’ and of overlapping in Vat and Service Tax.

8. Though in number of cases, the power of the respective government to determine the ‘taxable amount’ in case of composite contract is upheld, in none of the case, concrete ruling has been made to determine ‘taxable amount’ for the purpose of levy of Vat and Service Tax, out of ‘total amount’ received or receivable by the contractor, in such a manner, that even a small portion will not be subject to both the levy. As the courts must have realised the difficulty (rather impossibility) to determine the legitimate ‘taxable amount’ for both the enactments, it left the said issue open, to law makers, assessing authorities and contractors. The judgment in the case of BSNL is landmark in case of taxation of composite contracts. Even then, the Supreme Court left the issue of determination of taxable amount for the levy of vat on SIM card to the assessing authority. Therefore the dispute regarding determination of ‘taxable amount’ under both the enactments will continue in future as well. Under the circumstance it is worth noting the observation of Supreme Court in the case of
C. K. Jidheesh & Co. [144 STC 322(SC)] that “this court has in the case of Rainbow Colour Lab held that contracts of the type entered into persons like the petitioner are nothing else but service contracts pure and simple. It is held that in such contracts there is no element of sale of goods. This judgment is binding on this court. In view of this judgment, the question of directing the respondent to bifurcate the receipts into an element of goods and the element of service cannot and does not arise. We see no substance in the contention that facts in Rainbow Colour Lab’s case were different in as much as in that case the court was dealing with a case where photographers take photographs, develop them and then give the photos to the customer. In our view, the ratio of Rainbow Colour Lab’s case also applies to cases like the present.”

9. Though in case of L & T, the Supreme Court was concerned with the levy of sales tax in development contracts, the ruling laid down by it, regarding the measure for determination of value of goods transferred will also apply to other composite contracts involving goods and services. The Supreme Court ruled that the measure for the levy of tax has to be the value of the goods at the time of incorporation of the goods in works and not the cost of acquisition of the goods by the contractor. The value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner that meets this criteria. (Emphasis supplied) Accordingly, the State of Maharashtra was instructed to amend Vat Rule for determination of sale price of goods involved in the execution of works contract in order to meet the aforesaid criteria.

10. Thereafter i.e. on 31-1-2014, the SLP of Builders Association of India against the judgment and order of the Bombay High Court in Writ Petition No.2440 of 2012 decided on 30-10-2012 came up before the Supreme Court for hearing. The Government of Maharashtra informed the Court that, in order to give effect to the judgment in L & T’, it has amended entire Rule 58 w.e.f. 20-6-2006,
vide Notification No.VAT.1513/CR-147/Taxation-1 dated 29-1-2014 and submitted that the controversy in the SLP stands concluded by the decision in L & T’s case. The Supreme Court, without giving chance to Developers to point out as to how the amended Rule 58 does not satisfy the said criteria, disposed the said SLPs vide its order dated 31-1-2014 in the words
“we are satisfied that the controversy in the present Leave Petitions is concluded by the decision of this Court in L & T. We accordingly, dispose of the SLP in term of that Decision. It is, however, clarified that if the Petitioners have any grievance about the notification dated 29-1-2014, they may per sue their remedy in that regard. We further clarify that if the Petitioners file revised returns in terms of this order and/or notification dated 29-1-2014, such returns will be examined by the concerned assessing officer appropriately in accordance with law.”

11. Whether the Law i.e. Rule 58 which defines ‘sale price’ for all kinds of sales, is in consonance with sub-section (25) of Section 2 of the Maharashtra VAT Act? To find the answer, it is required to take into account, that in case of all kinds of “sales”, tax is payable on the “sale price” determined by Section 2(25). The said sub-section does not provide that, the sale price in case of composite contracts shall be determined, as prescribed. Therefore, it can be submitted that, the State Government has no power under section 2(25) or under the charging section to prescribe Rule for determination of “sale price” for composite contracts. In spite of the above, right from the inception of the MVAT Act, Rules 58 and 59 have been prescribed, to determine the “sale price” of goods, respectively in case of works contracts and in case of residential hotels charging a composite sum for lodging and boarding. In the absence of such power it can be submitted that the existence of Rules 58 and 59 is in doubt. Under the circumstance, whether the dealers should work out the sale price of such goods as per section 2(25) or as per Rules 58 and 59 or as per criteria laid down by the Supreme Court in L & T’s case? The issue that the Government of Maharashtra has no power under section 2(25) of the MVAT Act to prescribe Rule 58 or as the case may be Rule 59 was neither raised by the developers before the Supreme Court in L & T’s case nor by the hoteliers in any other case. In case of developers, it was only pointed out that Rule 58 is not giving proper results, so as to exclude price for non sale elements. Moreover, Rule 58 contains the words “value at the time of transfer, may be determined, by effecting the following deductions from the value of the entire contract”. The point to be noted is that, in the aforesaid rule, the word “may” is used and not “shall”. Therefore it can be submitted that, there is no statutory obligation on the contractor to work out the sale price as per Rule 58 and the contractor can determine the same by resorting to any other method also.

12. Assuming, the Government of Maharashtra has power to prescribe Rule 58 or as the case may be Rule 59, the contractors should make an attempt to segregate (determine) consideration, for sale of goods involved, in the composite contracts shown below:

  1. Deemed Sales (Works contract/Transfer of right to use goods);

  2. Sale having negligible element of service;

  3. Service having negligible element of goods;

  4. Supply of food by residential hotels for composite price.

13. In the case of Matushri Textiles Ltd. (132 STC 539 Bom), in view of ACC’s case of Supreme Court, it was held, “even where the contract involves negligible amount of transfer of property in goods, it would amount to works contract irrespective of whether the transfer of property in those goods is incidental or otherwise.” Therefore, in number of decisions after Matushri Textiles Ltd., even service contracts have been held as works contracts. In case of Matushri, as the main issue was whether the activity involved is works contract or not, the issue regarding the computation of sale price in case of such works contracts was not raised before the Bombay High Court. Therefore in case of contracts involving negligible value of material, the issue of determination of sale price is open on the ground of non workability. In Matushri’s case, the Bombay High Court held that its decision in the case of
RMDC Press Pvt. Ltd. (112 STC 307 Bom.) regarding ink used in job work of printing, is per incuriam. Therefore the Writ Petition was filed to Bombay High Court by Maharashtra Mudran Parishad against its decision to hold RMDC Press Pvt Ltd’s decision per incuriam. The issue of non workability of sale price of ink involved was also raised in it. However the Bombay High Court held that the assessing authority should decide the dominant object and the nature of contract in each case on its own fact. It is reported in 139 STC 193(Bom.). The SLP before the Supreme Court against the aforesaid decision is pending. Under the circumstance and in order to find out as to whether working out sale price is possible as per provisions made in the VAT Act of each State, it is appropriate to start with the State of Maharashtra by examining Rule 58, which is complicated and non workable for computation of taxable amount, in case of all kinds of works contracts.

14. Bare reading of Rule 58 reveals as follows:

(A) Value of goods at the time of its transfer may be determined:

  1. By effecting deductions mentioned in clauses (a) to (h) of sub-rule (1), from the entire contract value,

    by effecting deductions as per proviso to sub-rule (1) from the entire contract value @ 30% as per ‘Table’ appended;

  2. If the Developer opt for deduction @ 30% shown above, the ‘Note’ below the ‘Table’ clarify that the said percentage is to be applied after deducting from the total contract price:

    1. the cost of land determined under sub-rule (1A);

    2. the quantum of price on which tax is paid by the sub-contractor if any;

    3. the quantum of tax separately charged by the Developer if the contract provides for separate charging of tax;

  3. The value so arrived at is not the value of goods involved in the sale of flat; but it shall be determined by applying the percentage provided in the ‘Table’ appended to sub-rule (1B)(a);

  4. The amount determined as per sub-rule (1B)(a) is the ‘sale price liable to tax’ for the sale of flat and;

It will be liable to tax as per rate specified in the relevant entry of the ‘schedule’ read with notification if any.

15. Working of “sale price” and “tax amount” in case of works contracts as per Rule 58 is summarised in the following ‘Table’.




Amount in Rupees

Gross Sales price i.e. Total contract value
Section 2(25) 100.00
Less: Price paid to sub-contractor who is RD
Note below the Table appended to proviso to sub-rule (1) to Rule 58
Less: Cost of Land sub-rule (1A) to Rule 58 30.00
Sub-total 65.00
Less: Reduction as per clauses (a) to (h) of Rule 58(1) or as per percentage prescribed under the proviso to Rule 58(1) for labour, service charges etc.
For the purpose of this computation reduction @30% of total contract value as per proviso to Rule 58(1) in case of construction contract is taken into account.
Sub-total 45.50
100% of above amount is liable to tax at various rates (as the agreement is entered into before issue of Commencement Certificate)
Sr. No.(a) of ‘Table’ appended to clause(a) to sub-rule (1B) to Rule 58
Tax collected separately or otherwise
Net Taxable Amount
Tax Rate Value of Goods Tax Amount included Net Taxable Tax Payable
0% (on Tax free goods) 5.50 0 5.50 0
4% 10 0.38 9.62 0.38
5% 18 0.86 17.14
12.5% 12 1.33 10.67 1.33
Any other rate 0 0 0 0
Total 45.50 2.57 37.43 2.57

16. The computation shown in the ‘Table’ looks very simple, because prescribed percentage for labour, service charges etc. is taken into account. But to determine the actual value for labour, service charges etc. as per clauses (a) to (h) of Rule 58(1) is not only difficult, but next to impossible. Moreover clauses (a) to (h) of Rule 58(1) does not include all the service elements. The contracts where service element is very high and goods element is negligible, the “sale price” worked out as per Rule 58 will be very high, than the actual value of goods transferred even after value addition as held in case of L & T.

17. In case of Developers, the computation of “sale price” and “tax amount” for sale of each flat is very difficult especially on the background of Supreme Court’s observation in L & T, that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser. For this purpose the total consideration is required to be segregated in two parts. (i) Consideration pertaining to construction completed till the stage, the developer enters into a contract with the flat purchaser and (ii) Consideration pertaining to construction to be carried out from the stage, the developer enters into a contract with the flat purchaser.

18. The consideration covered under (i) will neither attract vat nor service tax, because, till then, it was neither works contract nor works contract service. The consideration covered under (ii) will have to be segregated in two parts viz. Vat & Service Tax.

19. Before going into aspect of overlapping as per working made by this Rule, it can be pointed out that this Rule does not provide deduction for consideration pertaining to construction completed till the stage, the developer enters into a contract with the flat purchaser. In the absence of such provision the question is whether the contractor should exclude such amount of consideration from the total contract value? The answer to above should be in the affirmative.

20. After the consideration covered under (i) is excluded, legitimately and logically, the segregation of the remaining consideration should be as follows.

Gross consideration Consideration for Vat Consideration for services
100 X Y
Remark: If the total of ‘X’ + ‘Y’ =more than 100, then it is overlapping in service tax and vat.

21. The question is who will ascertain the value for ‘X’ as well as for ‘Y’. If we analyse the provisions under both the enactments, we find that the ‘X’ + ‘Y’= more than 100. This excess amount is overlapping. Once there is such overlapping, whether consideration determined under Vat Act overlaps the consideration determined under Service Tax Act or vise versa is only of academic interest. In such case the important issue is to find out a legal solution to avoid overlapping. However the contractors are helpless and the law makers of the Union Government and of the States are not taking any efforts to avoid overlapping. In fact once a consideration for composite contract is disclosed by the contractor, the onus is on the respective Government to determine the correct value for taxation of Vat or as the case may be for Service Tax in order to avoid overlapping. Unfortunately the Rules for valuation under both the enactments are made in isolation and no authority is constituted to settle disputes of overlapping on the lines of Central Sales Tax Appellate Authority constituted u/s 19 of the Central Sales Tax Act, 1956.

22. The deduction for labour or service portion provided under Rule 58 at prescribed percentage, is much less than the percentage for levy of service tax prescribed as per Service Tax Rules 2A(ii) (A), (B), (C) which is respectively at 40%, 70% and 60% of total amount charged for the works contract. To be more specific when the levy of service tax is on the consideration arrived at 40%, 70% and 60%, then why Rule 58 provides for only 30% deduction for service portion in case of construction contracts and less than that in case of other contracts. As a result, in case of construction contract, after deducting 30% for services, vat will be payable on 70% value. As against the above, deduction for vat consideration available under service tax is 60%. This means there is overlapping of minimum 10% consideration.

23. Clause (c) of an Explanation provided to Service Tax Rule 2A(i) provides “where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then such value adopted for the purpose of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause.” As against the above, neither section 2(25) of the MVAT Act nor Rule 58 provides deduction for actual value of services involved in the works contract. First of all in case of composite contract there is no provision under the MVAT Act to pay sales tax on actual value of goods. Even if the contractor proves the actual value of material transferred in the execution of the works contract (after considering value addition as held by Supreme Court in L & T’s case), Rule 58 does not allow him to pay sales tax on such actual value. Therefore the aforesaid Explanation under the Service Tax Rules is only decorative piece of legislation having academic importance.

24. Other issue of overlapping is regarding determination of taxable turnover of sales for the purpose of levy of vat on food element in case of residential hotels charging composite sum for lodging and boarding. In the case of
Damodarasamy Naidu & Bros. (117 STC 1 SC) it was held “composite charges recovered by residential hotel providing boarding and lodging could not be bifurcated, unless rules were framed by Government of Maharashtra in this behalf. Levy of Sales Tax on food and drink prior to 2nd February, 1983 in the State of Maharashtra was bad in law, as there was no such provision in the Sales Tax Act which could be validated by section 6 of the 46th Amendment Act.” In view of the aforesaid decision Rule 31A was prescribed under the Bombay Sales Tax Act 1959. The aforesaid provision is also made in Maharashtra Vat Act vide Rule 59 which prescribes a fixed percentage under various situations for determination of sale price for supply of food and non alcoholic drinks where the charges are composite. This percentage in many cases may be high. However this Rule has a proviso for reduction of the sale price. It provides “if the claimant dealer produces evidence to the satisfaction of the Commissioner that the component of the taxable turnover of sales in the composite sum is less than the percentage given above, the Commissioner shall reduce the above percentage to the extent of actual sum of turnover of sales so proved.”
It is important to note that such proviso is not made under Rule 58.

25. Regarding the above proviso it can be stated that it is merely an eye wash because it is not possible for any such hotel to produce such evidence. As the law makers are aware that to work out the sale price of food so supplied is not at all possible, the responsibility of computing the turnover of sales has been cast on the hotelier. At the cost of repetition it can be stated that once the amount of entire consideration is disclosed by the assessee, it is the responsibility of the respective Government to work out the taxable amount with concrete evidence. But who cares? They only know to enact, without looking into aspect of its non workability or as the case may be non enforceability. Whenever this issue was taken to Courts, the Courts (even the Supreme Court in case of L & T) avoided to give the decision on this regard and left the assessee at the mercy of assessing officer.

26. Therefore the issue of overlapping cannot be solved unless it is raised before the Courts again and again till the Supreme Court rules that any contract can be either of sale of goods or of rendering of service and domination intention is of great importance to decide whether the contract in hand is liable to tax under Vat Act or Service Tax Act. In case it is held that it is liable to tax under both these enactments, the submission again and again should be raised for the final ruling of the Supreme Court that the consideration taxed under one enactment shall not be taxed under the other and the Union Government shall define the sale price under both the enactments in such manner that the consideration taxed under one enactment shall not be taxed under the other. Till the expectation expressed hereinabove is fulfilled we have no option but to see in what best possible manner the sale price under Vat Act can be worked out as per respective provision and keep on representing before the respective Government to amend the Law to avoid overlapping.
In this regard the judgment of High Court of Uttarakhand decided on 10-4-2014 in the case of Valley Hotel & Resorts v. The Commissioner, Commercial Tax, Dehradun is worth noting. On 6-6-2012, the Government of India, Ministry of Finance(Department of Revenue) issued a Notification amending the Service Tax (Determination of Value) Rules, 2006 by introducing Service Tax (Determination of Value) Rules, 2012 by which 40% of billed value to the customer for supply of food or any other article of human consumption or any drink in restaurant, was made liable to Service Tax. Therefore an application for revision u/s 57 of the said Vat Act was filed to the Commissioner, Commercial Tax requesting not to charge VAT on 40% billed amount, as the same has already suffered service tax. The said application was rejected and the applicant moved the High Court against the said rejection. The High Court observed that “Value Added Tax can be imposed on sale of goods and not on service. Service can be taxed by Service Tax Laws. The authority competent to impose service tax has also assumed competence to declare what is service. The State has not challenged the same. Therefore, where element of service has been so declared and brought under the Service Tax vide the said Notification dated 6-6-2012 whereby 40% of the bill amount was made liable to service tax, no VAT can be imposed thereon.” Accordingly it was held “the Commissioner, Commercial Tax erred in rejecting the application of the revisionist. Thus, the revision is allowed. Judgments of Tribunal as well as of the Commissioner, Commercial Tax are set aside. The Commissioner, Commercial Tax is directed to pass order afresh in the light of above observations.”

27. To study the provisions under Value Added Tax Act of each State in order to find out the overlapping issues is not possible for constraint of space. Therefore the provisions under Andhra Pradesh and Tamil Nadu Act are discussed hereinafter in nutshell.

28. Under Andhra Pradesh Value Added Tax Act section 4 is the charging section. Sub-sections (7) and (8) thereof provides respectively for taxation of works contracts and contracts for transfer of right to use.

  1. In case of works contracts, clause (a) of sub-section (7) to section 4 provides “every dealer executing works contract shall pay tax on the value of goods at the time of incorporation of such goods in the works executed at the rates applicable to the goods under the Act, provided that where accounts are not maintained to determine the correct value of goods at the time of incorporation, such dealers shall pay tax at the rate specified in Schedule V on the total consideration received or receivable subject to such deductions as may be prescribed.” Thus the responsibility to work out the value of such goods is cast on the contractor and if he is unable to work out the same, he is bound to pay tax on the total consideration after deductions as per rules prescribed. Accordingly Rule 17 has been prescribed for determination of value of such goods. Sub-clauses (d), (e) and (g) of sub-rule (1) of Rule 17 prescribed various methods; but there is no direct provision to exclude the portion of consideration from the levy of Vat on which Service Tax is levied. As such this Act also has the issue of overlapping.

  2. In case of contracts for transfer of right to use, sub-section (8) to section 4 provides “every vat dealer who transfers the right to use goods taxable under the Act for any purpose whatsoever, whether or not for a specified period, to any lessee or licensee for cash, deferred payment or other valuable consideration, in the course of his business shall, on the total amount realised or realisable by him by way of payment in cash or otherwise on such transfer of right to use such goods from the lessee or licensee pay a tax for such goods at the rate specified in the Schedules.” These transactions are also liable to service tax. The sub-section (8) to Section 4 of Andhra Pradesh Vat Act also has the issue of overlapping because it does not have provision to exclude the portion of consideration from the levy of Vat on which Service Tax is levied.

29. Under Tamil Nadu Value Added Tax Act there are separate charging sections for levy tax on normal sales, levy of tax on right to use any goods and for levy of tax on transfer of goods involved in works contract. Moreover the term “taxable turnover” has been defined u/s. 2(38). As per aforesaid section “taxable turnover means the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed.”

  1. As per section 4 no deduction except for export in case of levy of tax on right to use any goods has been provided and hence vat is payable on the entire consideration.

  2. Section 5(1) provides “Notwithstanding anything contained in this Act, but subject to the provisions of this Act, every dealer, shall pay, for each year, a tax on his taxable turnover, relating to his business of transfer of property in goods involved in the execution of works contract, either in the same form or some other form, which may be arrived at in such manner as may be prescribed, at such rates as specified in First Schedule.” Accordingly sub-rule (5) to Rule 8 has been prescribed to grant various deductions. Clause (d) thereof provides “all amounts towards labour charges and other charges not involving any transfer of property in goods, actually incurred in connection with the execution of works contract, or such amounts calculated at the rate specified in column (3) of the Table below, if they are not ascertainable from the books of account maintained and produced by a dealer before the assessing authority.

The Table

Sr. No. Types of works contract Labour or other charges as a percentage value of the works contract

1 Electrical contracts 15
2 All structural contracts 15
3 Sanitary contracts 25
4 Watch and/or clock repair contracts
5 Dyeing contracts 50
6 All other contracts 30

Comparing the aforesaid Rule with Rule 58 of the Maharashtra Vat Rule, it is far rational because it does not restrict the reductions on account of labour and other charges of a particular type. However the common problem of identifying the value of such labour is present in this rule also. Moreover the percentage prescribed for deduction is also arbitrary. Therefore this Act also is not free from the issue of overlapping.

30. On the above back ground different aspects of Rule 58 of the Maharashtra Vat Rules are explained hereinafter.

31. How to compute the value(turnover) of goods transferred in a particular period(Month/Quarter/Six Month):
In L & T case the Supreme Court held that “the value addition made to the goods transferred after the agreement is entered into with the flat purchaser can only be made chargeable to tax by the State Government. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner that meets this criteria.” Therefore it is clear that the tax is payable on the ‘value of goods’ and not on the entire consideration. As such computation of value of goods at the time of its transfer has great importance.

32. On which date Tax on sale of flat becomes payable: Tax becomes payable when the sale becomes complete or gets concluded. The Definition of “sale” u/s 2(24)(b)(ii) of the MVAT Act merely defines what is the meaning of “sale”. Section 6 of the MVAT Act is a charging section. It provides that sales tax shall be levied on the ‘turnover of sale’ of goods. The ‘turnover of sales’ means the aggregate of the amount of ‘sale price’ received and receivable in respect of any sale of goods made during a given period. In case of works contract ‘sale price’ will become due(receivable) after the sale gets complete by transfer of property in goods.

33. Taxable Event: In case of Project and Service Centre (82 STC 89 Guahati) it was observed “transfer of property is a common factor for a concluded sale of normal goods as well as in case of works contract. In case of normal sale, it gets concluded when delivery is taken from the transporter or when the documents are retired from bank. In case of works contract, sale would get concluded when the goods will be transferred in the execution of a works contract.” The Supreme Court in L & T case has approved this principal which was laid down by it in Gannon Dunkerley II in the words “since, the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works.”

34 Taxable Event in case of Construction Contracts:
In view of the above it can be said, that even in case of works contract of construction and sale of flat, the sales tax would become payable not at the time when the agreement is entered into or registered, but at the time when the transfer of property in goods involved in construction of flat takes place. Therefore the time (taxable event) to pay tax is, when after completion of part construction, the Developer demands the consideration from the flat purchaser. The date fixed in the agreement for payment of each installment (by the purchaser) after completion of each stage(plinth/floor etc.), is the time(event) for making payment of sales tax in case of goods involved for construction upto that stage. As such in case of sale of flat, the time for payment of a particular installment is generally fixed, after incorporation of goods i.e. after completion of particular stage such as plinth, floor etc. In support of the above the Supreme Court in L & T’s case in Para 124 seems to have held that “Taxing the sale of goods element in a works contract is permissible even after incorporation of goods”. Therefore it can be said that the amount of tax payable by the Developer in a particular period(Month/Quarter/Six Month) should be on the amount of installment or installments due in such period.

35. In short the percentage prescribed in sub-rule(1B) to Rule 58 to determine the value of goods involved is arbitrary and hence any other method worked out by the Developers should have been accepted after satisfaction of the Commissioner about its correctness.

36. The computation shown in the ‘Table’ looks very simple, but, while filing the return for a particular period(Month/Quarter/Six Month), following points will emerge in working out ‘sale price’ and ‘tax rate wise price of goods’ for levy of tax at different rate:

(i) Where the Developer wish to collect tax on the ‘sale of flat’ he shall issue Tax Invoice as per this ‘Table’.

(ii) Section 60(2) of the MVAT Act prohibits a Registered Dealer to collect any amount by way of tax in excess of the amount of tax payable by him. If he does so, he is liable to pay penalty u/s 29(10)(a) at Rs.2,000/-. In addition section 29(10)(b)provides that excess collection of tax shall be forfeited.

(iii) Above provision cast a responsibility on the Developer to collect exact amount of tax payable by him on the sale of flat. Moreover the flat buyer will not pay excess amount on account of tax.

(iv) Looking to Rule 58 it can be said that it is impossible for a Developer to collect exact amount of tax in order to save himself from the levy of penalty and forfeiture provided u/s 29(10). As such this Rule can be challenged on the ground of its non workability explained hereinafter.

(v) The proviso to sub-rule (1A) provides that after the payment of tax by deducting land cost as per sub-rule (1A), if the Developer proves before the Depart of town planning and valuation that the actual cost of land is higher than determined in accordance with the Annual Statement of Rates etc. the excess tax paid if any would be refunded.
In this regard it can be said that in such case, whether the Developer is allowed to keep the said amount of refund. Obviously the answer is in the negative because this would be treated as excess collection liable for forfeiture as explained hereinabove. In fact only the buyer of such flat is entitled to claim such refund. Moreover is their any Machinery provided under the MVAT Act for granting such flat wise refund to respective buyer. Instead, the criteria of prepayment of tax is required to be removed.

(vi) Computation shown in the ‘Table’ would be easy, if it is assumed that the project of construction is of a single bunglow and that too under assumption that the entire project is commenced and completed in a particular period (Month/Quarter/Six Month).

(vii) In construction activity, in each project, several flats are booked under constructions and then sold. The consideration received for flats sold as immovable property is required to be excluded as no tax is payable on such flats. Similarly, the consideration received in respect of completed sale before 20/06/2006, is also required to be excluded, as no tax is payable on such sale of flats. Other consideration received and due during a ‘Return Period’ will alone be determined as GTO. The (i) land cost,(ii) 30% element for labour, (iii) Price paid to Sub-contractor who is RD, should be as worked out in proportion to GTO of ‘Return Period’ and the total of (i),(ii), and (iii) is eligible for deduction from GTO.

(viii) The Balance as arrived above, will be subject to percentage as per Sr.No.(a) or (b) or (c) or (d) or (e) of ‘Table’ appended to clause(a) to sub-rule(1B) to Rule 58 and the amount arrived at by applying the said percentage shall be the value of goods liable to tax .

(ix) However the
difficulty is, during the ‘Return Period’, consideration received
may be for various agreements which were entered into at
stages mentioned at Sr.No.(a) or (b) or (c) or (d) or (e) of ‘Table’ appended to clause(a) to sub-rule(1B) to Rule 58. The working for every flat sold is required to be done separately.

(x) The value as arrived after applying the relevant percentage mentioned above for every sale of flat, will be liable to tax at 0%,4%,5%,12.5% or at any other rate applicable to respective goods transferred during the ‘Return Period’.

(xi) However the difficulty is, during the ‘Return Period’, there may not be any purchase of material or the purchases may be only of particular goods liable to tax at different rate. Then how to collect tax at different rate applicable to goods transferred.

(xii) Even under presumption that the ratio of overall tax rate wise purchases required for the entire project shall be applied, then also, it is required to keep in mind that no Developer purchases entire material at the commencement stage; and therefore to determine ‘tax rate wise value of goods’ according to Rule 58 is not at all possible.

(xiii) Therefore it can be said that the value of goods liable to tax at different rate determined as per Rule 58 during a “Return Period” cannot be as per criteria laid by the Supreme Court in L & T case.

(xiv) In L & T case, the criteria laid down by the Supreme Court is that
“the value of the goods which can constitute the measure of the levy of tax, has to be the value of the goods at the time of incorporation of goods in the works”. In view of the above criteria, the Maharashtra Government was directed to bring clarity in Rule 58 in order to meet the said criteria. However after making an attempt to work out (as per amended Rule 58), it can be concluded that the value of goods in respect of each transaction of sale of flat, cannot be worked out tax rate wise and in view thereof the amended Rule 58 is not satisfying the said criteria.

(xv) Moreover, the condition in sub-rule(1B) to Rule 58 to furnish a Certificate from the local or planning Authority or RCC consultant is without taking into account the legal provisions under the respective Act and practice followed in the construction business.

(xvi) Instead, the proviso, on the lines of Rule 59 should have been inserted to sub-rule(1B) to Rule 58 to provide
“that if the Developer produces evidence to the satisfaction of the Commissioner that the value of goods at the time of incorporation is less than the percentage given in sub-rule(1B) to Rule 58, the Commissioner shall reduce the above percentage to the extent of actual sum of turnover of sales, so proved.”

(xvii) Moreover if the amendment to sub-rule (1) to Rule 58 is also carried out to provide deductions in addition to clauses (a) to (h) which are for other than goods element, then the value of goods so arrived at would be as per criteria laid down in L & T case.

37. The other issue of overlapping is whether vat is payable on service tax recovered on the transaction of composite contracts. The view taken by the Commissioner of Sales Tax Maharashtra State in case of Sujata Painters (DDQ-11-2007/Adm-3/16/B-1 dated 20-1-2012) is that service tax recoverable from the contractee is a cost separately charged before delivery of goods and therefore shall be included in sale price and vat thereon becomes payable. The above decision and other decisions on the above line have been challenged before the Tribunal and High Court. It can be submitted that, service tax is attracted only when the job is completed. Service tax is basically a tax to be levied after the contract is fully executed. As such service tax collection is in the nature of post sale/service and hence whatever is collected after the sale/service is complete, cannot become the part of contract value. It was held by the Supreme Court long back in the case of
Anand Swarup Mahesh Kumar(46 STC 477) “where a dealer is authorized by law to pass on any tax payable by him on a transaction of sale to the purchaser, such tax does not form part of the consideration for purpose of levy of tax on sales. Considering the above submissions and decision of Anand Swarup Mahesh Kumar, levy of vat on service tax will not survive.

38. Right from the inception of the Bombay Sales Tax Act, Octroi recovered from the purchaser is being added to ‘sale price’ liable to sales tax. Moreover under Octroi provision, the purchase price at the hands of the purchaser is being increased by the amount of sales tax paid to vendor and on the value so arrived at, octroi is being levied. Therefore the sale price under the Bombay Sales Tax Act cannot be treated as purchase price for the levy of octroi and vice versa. This is nothing but tax on tax. Looking to the ratio of Anand Swarup Mahesh Kumar, all decisions to add octroi in sale price for levy of sales tax and vice versa should not survive and are required to be challenged.

39. Summing up: Every one is optimistic that after the introduction of GST, overlapping will come to an end. Regretfully I state that the manner in which GST is being introduced, the issue of overlapping will not get solved. At the most under GST, the issue of overlapping in service tax and vat will get solved; but what about overlapping in other levy of taxes by Local Bodies? Why two parts of GST i.e. SGST & CGST are in pipe line? If this is done, there will be overlapping of assessment powers between Excise Department and Sales Tax Department and lakhs of assesses will continue to produce the books of accounts before both the departments. This is to maintain the autonomy of Government at Centre and at States so much so of Local Bodies, at the cost, time and energy of assesses. In order to abolish all other indirect taxes and subsume them in GST and also in order to have single GST Department by merging together the Excise and Sales Tax Departments, the continuous efforts by all the Associations of professionals are needed.

[Source : Article published in Souvenir of National Tax Conference held on 20th & 21st December, 2014 at Jaipur]

Deepak K. Bapat, Advocate