List of Pending Appeals before Income Tax Appellate Tribunal

Figures of Institution, Disposal and Pendency of Appeals as on 1-8-2016


Number of Sanctioned Benches

Numbers of Members

Institution for the Month of July, 2016

Disposal for the Month July, 16

Total Pendency (Including SMC Cases)

SMC Pendency

Dis. of Tax Effect up to 10 Lacs















































































































RANCHI (Jhark hand) Circuit Bench














































































































The Employees' State Insurance Act, 1948 provides an integrated social insurance scheme that protect the interest of workers in contingencies such as sickness, maternity, temporary or permanent physical disablement, injury resulting in loss of wages or earning capacity, death while or due to employment. The Act also guarantees reasonable and good medical care to workers and their immediate dependants.


The Employees' State Insurance Act was enacted by the Parliament of India in the year 1948. It was the first major legislation on Social Security in independent India to provide certain benefits to the employees in the organised sector in case of sickness, maternity and employment injury

The subject of health insurance for industrial workers was first discussed in 1927 by the Indian Legislature, when the applicability of the Conventions adopted by the International Labour Conference was considered by the Government of India. The Royal Commission on Labour, in its report of 1931, stressed the need for health insurance for workers in India. One of the earlier decisions of the Labour Ministers' Conferences between 1940 and 1942 was to invite an expert to frame a scheme of health insurance for workers.

In pursuance thereof, the responsibility for preparing a detailed scheme of health insurance for industrial workers was entrusted in March 1943 to health insurance for industrial workers was entrusted in March 1943 to Prof. B.P. Adarkar who submitted his report in December 1944. This was considered by the Government of India and State governments as well as other interested parties.

The Adarkar Plan and various other suggestions emerged finally in the form of Workmen's State Insurance Bill, 1946, which was then referred to a Select Committee in November 12, 1947. The Select Committee extended the coverage to all the employees in factories, and changed its name from Workmen's State Insurance Bill to Employees' State Insurance Bill. The Employees' State Insurance Act came into force from 19th April, 1948.

The Central Government established a Corporation to be known as the 'Employees' State Insurance Corporation is the premier social security organisation in the country. It is the highest policy making and decision taking authority under the ESI Act and oversees the functioning of the ESI Scheme under the ESI Act.

For the administration of the of Employees' State Insurance scheme , the Employees' State Insurance Corporation Standing Committee and Medical Benefit Council have been constituted. Further, ESI Fund has been created which is held and administered by ESI Corporation through its executive committee called Standing Committee with the assistance, advice and expertise of Medical Council and Regional and Local Boards and Committees.

The Corporation has its headquarters at New Delhi, besides regional offices/sub regional offices in the States and more than 800 local offices throughout the country. While the administration of the Scheme, including coverage, collection of contribution, disbursement of cash benefits, etc. are under the Corporation, the extension of medical care is administered by the respective State Governments on a cost sharing basis.


The Employees' State Insurance Act, 1948 provides for certain benefits to employees in case of sickness, maternity and employment injury and also makes provisions for certain other matters in relation thereto. The Act has been amended by the Employees' State Insurance (Amendment) Act, 2010 for enhancing the Social Security Coverage, streamlining the procedure for assessment of dues and for providing better services to the beneficiaries.

The Act extends to the whole of India. The Central Government is empowered to enforce the provisions of the Act by notification in the Official Gazette, to enforce different provisions of the Act on different dates and for different States or for different parts. The Act applies in the first instance to all factories except seasonal factories. Act also applies to a factory or establishment belonging to or under the control of the Government whose employees are otherwise in receipt of benefits substantially similar or superior to the benefits provided under the Act. Section 1(5) of the Act empowers the appropriate Government to extend any of the provisions of the Act to any other establishment or class of establishments, industrial, commercial, agricultural or otherwise after giving one month's notice in the Official Gazettee. However, this can be done by the appropriate Government, only in consultation with the Employees' State Insurance Corporation set up under the Act and, where the appropriate Government is a State Government, it can extend the provisions of the Act with the approval of the Central Government.

Under these enacting provisions, the Act has been extended by many State Governments to shops, hotels, restaurants, cinemas, including preview theatres, newspaper establishments, road transport undertakings, etc., employing 20 or more persons. It is not sufficient that 20 persons are employed in the shop. They should be employee as per Section 2(9) of the Act, getting the wages prescribed therein
ESIC v. M.M. Suri &Associates Pvt. Ltd., 1999 LAB IC SC 956

It may be noted that a factory or an establishment to which the Act applies shall continue to be governed by this Act even if the number of persons employed therein at any time falls below the limit specified by or under the Act or the manufacturing process therein ceases to be carried on with the aid of power. The coverage under the Act is at present restricted to employees drawing wages not exceeding
15,000 per month.


The ESI Scheme is a comprehensive social security scheme devised to protect the employees covered under the Scheme against financial distress arising out of events of sickness, maternity, disablement/death due to employment injuries and to provide medical care to the employees and their families. The Scheme is based on the principle of ‘pooling of risks and
resources’, wherein that section of the population which is exposed to risks of the same nature, come together to mitigate the physical and financial distress arising out of such risks.

The employers play a major role in the functioning of the Scheme, through registration of its employees, remittance of contribution and through compliance with the provisions of the Act. This guide is meant to be a reference booklet for the covered and coverable employers, whose role is pivotal for the success of the Scheme.


a) All Factories/Shop Employing
10 or more
persons whether they are run by Power or without Power (w.e.f. 1st June, 2010)

b) Shop Employing
20 or more persons for Maharashtra, Assam, H.P. & U.P.

c) The existing wage-limit for coverage under the Act, is 15,000/- per month, excluding overtime wages. (with effect from

d) Disabled Employees wage limit for coverage under the Act, is 25000/- per month, Insurance Number is to be taken from respective branch office.

e) Any Establishment which the State Government may specifically notify as being covered.

f) Certain States like Delhi, Punjab, Karnataka, Andhra Pradesh ESIC Applicable on 10 employees to different industries. (School, Hospitals, etc.)


As soon as the above conditions are fulfilled the employer should furnish the details in Form- 01 to ESIC office for registration under the ESI Act, 1948 & Obtaining of the Company’s Code Number.

Employer Registration under the Act

Any employer who becomes coverable under the Act can register online ( and get registered. While registering online, the employer has to give correct and complete details. Once registered, the employer will be allotted a 17 digit employer code. Except for employers who supply manpower, all the employers can proceed with the compliance under the Act, without even visiting the ESI offices, like registering the employees employed, filing periodical returns, etc. That can be done online.

The employer who is already registered under the ESI Act need not apply for registration afresh in respect of its branch offices located in different locations of the country. Instead of that, the employer can get a sub-code generated in respect of its branch offices by online, so as to comply with the provisions of the Act. Sub-codes need to be generated only in respect of offices located outside the jurisdiction of the Regional Office / Sub-Regional Office in which the main office is located. In other words, if the branch office is located in the same State in which the main office is also located, a separate sub-code need not be generated for the branch office; the branch can comply under the main code itself.


The Scheme is funded by the contributions raised from the employees and employers of the covered employers. The rates of contribution, as a percentage of wages paid/payable to the employees, are as under:

Employees’contribution – 1.75% of the wages Employers’ contribution
– 4.75% of the wages

Thus, in respect of each of the employee, 6.50% of the wages (including overtime allowance) is to be paid as contribution to Scheme. The Scheme does not receive any budgetary support from the Government. The State Governments, as per the provisions of the Act, contribute 12.5% of expenditure on medical care on ESI beneficiaries in their respective States within the per capita ceiling.

Only those of the employees whose monthly remuneration, excluding overtime wages, does not exceed 15,000 per month are entitled for coverage under the Scheme, the employer need to register those employees alone. However, for the purpose of coverage under the Scheme, i.e., whether the employer has employed ten or more employees, all employees employed by the employer, irrespective of the salary are considered.

In respect of employees whose average daily wages is less than 100 per day, the
employee’s share need not be paid. However, the employer’s share (4.75% of the wages) need to be paid.

Online Registration of Employees

All employees, including casual labour, temporary employees, employees employed through contractors (outsourced) etc. have to be registered by the employer.

The organisation which utilises the services of the contract employees need not register these employees under the Scheme, if they are already registered by the contractor. However, as
the principal employer, that organisation would be responsible for the remittance of contribution in respect of such employees by the contractor under the ESI Act. So, the organisation employing outsourced employees should ensure that the contractor through whom these employees are employed is complying under the provisions of the Act.

The employees who are being registered under the Scheme afresh, an insurance number is allotted and a Temporary Identity Card (TIC) is generated; this TIC is valid for a period of 3 months from the date of registration, in this period the employee has to enrol for the Pehchan card (Bio-Metric card). In case of employees who are already registered, their name would be linked to the current employer, which can be checked in the employer’s portal as well as the employees’ portal.

Benefit of the ESI scheme to the employer

The benefit availed by employer under the Scheme are as follows:

a) No expenditure to be incurred towards administration of medical care to the employees/their dependants.

b) No requirement for medical insurance policy as all medical facilities, including Super speciality treatment is extended to the beneficiaries, without any ceiling on expenses.

c) Employers are exempted from the provisions of/liabilities under:

i) Maternity Benefit Act

ii) Employees’ Compensation Act

Benefit of the ESI scheme to the employees








I.P. Should work for wages for 78 No. of days in the corresponding C.P. (w.e.f. 19-9-1998)

91 Days Cash Benefits within Two Benefits Periods

70% of S.B.R.

Only to the insured person

(b) Extended sickness benefit for specified long -term diseases like TB, Leprosy etc.

In Insurable employment for at least two years should pay contribution for minimum of 156 days in the preceding 4 C.P’s

309 days duration has been extended beyond 400 days (91 days S.B. plus 309 days E.S.B.) to two years in deserving cases

80% more than the S.B.R.

Only to the insured person

(c) Enhanced sickness Benefit (for undergoing sterilisation operation for family Planning)

Same as for sickness benefit at (a) above

7 days for vasectomy & 14 days for tubectomy extended in cases of post-operative complications etc.


Only to the insured person

2. Disablement benefit (employment injury)

No Condition

In case of temp disablement: as long as incapacity lasts & in case of permanent disablement: for life time.

(a) For Temporary Disablement, 90% of S.B.R.

Only to insured person

– Where more injuries than one are caused by the same accident, the rate of benefit payable under clauses (c) & (d) shall be aggregated but not so in any case as to exceed the FULL RATE and in cases of disablement not covered by clauses (a), (b), (c) & (d) at such rate, not exceeding the FULL RATE, as may be provided in the regulations.

(b) For permanent Total Disablement specific in Parts 1 to 2 schedule at the 90% of S.B.R.

(c) For permanent partial disablement resulting from an injury specific in Part II of the 2nd Schedule at such %age of the Full Rate as specific in the said Schedule as being the %age of the loss of earning capacity caused by the injury.

(d) For permanent partial disablement resulting from an injury not specified in Part II of the 2nd Schedule at such %age of the Full Rate payable in the case of Permanent Total Disablement as in Proportionate to the loss of earning capacity permanently caused by the injury.

3. Dependent’s Benefit (employment injury)

No Conditions

1. To the widow/s during life time until remarriage.

2. To the widowed Mother

To the legitimate or adopted SON/S until he attains the age of 25 yrs. (w.e.f. 1st June, 2010)

3/5th of FULL RATE, if there are 2 or more widows, the amount payable to the widow shall be divided equally between the widows.

2/5th of the FULL RATE, if there are 2 or more sons, the amount payable to the son shall be divided equally between the sons.

Subject to min. of ₹ 14/-.

To the legitimate or adopted unmarried daughter/s until she attains the age of 25 yrs. (w.e.f. 1st June 2010) or until marriage, whichever is earlier


(in case the deceased person does not leave a widow or legitimate or adopted child. D.B. shall be payable to …..

3/10th of the FULL RATE

2/10th of the FULL RATE

a) Parent or grandparent, for a life.

b) Any other male dependent, until he attains the age of 18 yrs.

c) Any other female dependent, until she attains the age of 18 yrs. or until marriage whichever is earlier.


NB:- An insured person whose PERMANENT DISABLEMENT has been assessed as final and who has been awarded permanent disablement benefit at a rate not exceeding ₹ 5/- per day may apply for a lump-sum payment and such amount shall be determined by multiplying the daily rate of permanent disablement benefit by the figure indicated in Col. 2 of the Schedule III of the Regulations.

4. Maternity Benefit

Payment of contribution for 70 days in one or two consecutive periods

12 weeks of which not more than the 6 weeks can precede the expected date of confinement.

6 weeks for miscarriage or for medical termination of pregnancy. Additional payment for one month for complications (pre or post) arising out of pregnancy.

100% of average daily wages; subject to min. of ₹ 25/-per day.

Medical bonus of ₹ 5,000/- per confinement w.e.f. 1-10-2013 where ESI hospital facility is not availed for child delivery

Only to the Insured Person.

To insured woman or in r/o wife of I.P.

5. Medical Benefit

No Condition

From the date of entry of an employee into an insurable employment as long as he remains insurable employment and thereafter for certain additional period

Full Medical care including hospitalisation

Person as well as his/ her family Members as defined u/s. 2(11) of the Act

6. Funeral Expenses

No conditions (i.e. merely by virtue of being an insured person)

One time lumpsum payment

Not more than Rs. 10,000/- (w.e.f. 01/04/2011)

To the eldest surviving member of the family of the deceased I.P. or to the person who actually incurs the expenditure on the funeral of an I.P.

7. Rehabilitation Allowance

No Condition

For each day of which I.P. remains admitted in Artificial Limb Centre for fixation repair or replacement of artificial limb

Double the standard sickness benefit rate but not less than full wages

Only to the I.P.

8. Medical benefit to insured persons who ceases insurable employment on account of permanent disablement

No conditions but an I.P. has to pay ₹ 10/- pm in Lump-sum for one year in advance every year i.e. ₹ 120/-

Till the date on which an I.P. would have attained the age of superannuation


Medical Benefit to IP and spouse

9. Medical Benefit to retired insured Period (Old Age Medical Care)

1) Insurable employment for a period of 5 years &

2) In case of permanent physical disablement during the course of insurable employment

3) Payment of Contribution @ ₹ 10/- pm in lump Sum for one year in advance, each year. ₹ 120/-

Till the time yearly contribution is paid to the concerned office of the corporation


Insured person and his spouse


Now it has added the benefit for workers for the accidents happening while commuting to the place of work and vice versa; (w.e.f. 1st June, 2010)

Unemployment Allowance (Rajiv Gandhi Shramik Kalyan Yojana)

Unemployment Allowance is payable to those workers facing involuntary unemployment due to closure of factory/establishment; retrenchment or permanent invalidity arising out of non-employment injury. The daily rate of unemployment allowance is at par with the standard sickness benefits rate. Which is just above 50% of the average daily wages. This allowance is payable for a maximum period of 12 months either in one spell or in different spells of not less than one month’s duration the insured persons eligibility condition has now been relaxed to three years from earlier five years, for being able to avail the unemployment allowance. Medical Care also provided during this period.

To avail this benefit the insured person should have been entitled for sickness benefit during the last four contribution periods immediately preceding the date of unemployment

Supply of special aids:
Insured persons and members of their families are provided artificial limbs, hearing aids, artificial dentures, spectacles (for insured person only) & artificial appliances like spinal supports, cervical collars, walking callipers, crutches, wheel chairs and cardiac pace makers, dialysis/dialysis with kidney transplant etc. as part of medical care under the ESI scheme.




1st April to 30th September

1st January to 30th June

11th November

1st October to 31st March

1st July to 31st December

12th May

Obligations of Employers

1. The employer should get his factory or establishments registered with the E.S.I. Corporation within 15 days after the Act becomes applicable to it, and obtain the employers Code Number.

2. The employer should obtain the declaration form from the employees covered under the Act and submit the same along with the return of declaration forms, to the E.S.I. office. He should arrange for the allotment of Insurance Numbers to the employees and their Identity Cards.

3. The employer should deposit the employees and his own contributions to the E.S.I. Account in the prescribed manner, whether he has sufficient resources or not, his liability under the Act cannot be disputed. He cannot justify non-payment of E.S.I. contribution due to non-availability of finance.

4. The employer should furnish a Return of Contribution along with the challans of monthly payment, within 30 days of the end of each contribution period.

5. The employer should not reduce the wages of an employee on account of the contribution payable by him (employer).

6. The employer should cause to be maintained the prescribed records/registers namely the register of employees, the inspection book and the accident book.

7. The employer should report to the E.S.I. authorities of any accident in the place of employment, within 24 hours or immediately in case of serious or fatal accidents. He should make arrangements for first aid and transportation of the employee to the hospital. He should also furnish to the authorities such further information and particulars of an accident as may be required.

8. The employer should inform the local office and the nearest E.S.I. dispensary/hospital, in case of death of any employee, immediately.

9. The employer must not put to work any sick employee and allow him leave, if he has been issued the prescribed certificate.

10. The employer should not dismiss or discharge any employee during the period he/she is in receipt of sickness/maternity/temporary disablement benefit, or is under medical treatment, or is absent from work as a result of illness duly certified or due to pregnancy or confinement.

New Amendment passed by Parliament

U/s. 45 AA of ESI Act:

• Sec. 45AA. If an employer is not satisfied with the order referred u/s. 45A, he may prefer an appeal to an appellate authority within 60 days of such order after depositing 25% of actual amount due, whichever is applicable.

• Provided that if employer finally succeeds in the appeal, the Corporation shall refund such deposit to the employer together with such interest as specified in the regulation

Employees Insurance Court

• Any dispute arising under the ESI Act will be decided by the Employees Insurance Court and not by a Civil Court. It is constituted by the State Government for such local areas as may be specified and consists of such number of judges, as the Government may think fit.

Penal Provisions

Offences and Penalties



1) Whoever, knowingly makes any false statement or representation for the purpose of (a) claiming or increasing any benefit or payment allowable to him, or (b) avoiding any payment payable by him

Imprisonment up to 6 months or fine up to
2,000/- or both

2) a) Failure to pay
employees’ contributions deducted from their wages

Imprisonment up to 3 years (minimum one year) and fine of 10,000/-

b) Failure to pay contributions

Imprisonment up to 3 years (minimum 6 months) and fine of 5000/-

c) Deduction of any sum from or reduces wages of an employee on account, of employers contribution

Imprisonment up to one year or fine up to
4000/- or both

d) Reduction of the wages or any privilege or benefits admissible to an employee in contravention of section 72

Same as above

e) Dismissal/discharge of an employee in contravention of Section 73

Same as above

f) Failure to submit any return or submission of false return

Same as above

g) Obstruction of any inspector in allowing him to discharge his duties

Same as above

h) Contravention of any other provision of the Act, rules or regulations

Same as above

3) On every subsequent offence committed after conviction for the same offence being so mentioned at 2(a) or (b) above

Imprisonment up to 5 years (minimum 2 years) and fine of 25000

4) On every subsequent offence committed after conviction for the same offence being any other offence

Imprisonment up to 2 years and fine of 5000/-


Different punishment have been prescribed for different types of offences in terms of Section 85: (I) (Six months imprisonment and fine), and 85-A: (five years imprisonment and not less than 2 years) and 85 C (2) of the ESI Act, which are self explanatory. Besides these provisions, action also can be taken under Section 406 of the IPC in cases where an employer deducts contributions from the wages of his employees but does not pay the same to the Corporation which amounts to criminal breach of trust.

Provision for non-payment

For employees’ contribution : Imprisonment for 1 yr. to max. 3 yrs. and/or fine of 10,000/-

For employers’ contribution : Imprisonment for 6 months to max 3 yrs. And/or fine of 5,000/-

Employees Insurance Court

A dispute arising under the Act shall be decided by the Employees’ Insurance Court and not by a civil court. The Employees’ Insurance court shall be constituted by the State Government for such local areas as may be specified and consisting of such number of judges as the Government may think fit.

Conditions for Admission of Certain Disputes

No matter which is in dispute between an employee and the ESI Corporation in respect of any contribution or any other dues shall be admitted unless the employer deposits with the court @ 50% of the amounts due from him as claimed by the Corporation.

The court may, however waive or reduce the amount to be deposited for reasons to be recorded in writing.


An appeal shall made to the High Court against an order of an
Employees’ Insurance Court, if it involves a substantial questions of law. The appeal should be preferred within 60 days.


Cash benefits payable under the Employees’ State Insurance Act are not liable to attachment or sale in execution of any court decree or order. Also, the right to receive any benefit is not transferable or assignable.

Where a dispute arises under the provisions of the Act, that matter has to be decided by the
Employees’ Insurance Court and not by civil court. An appeal will lie to the High Court from an order of the
Employees’ Insurance Court if it involves a substantial question of law. The period of limitation for appeal is 60 days. The delay can be condoned for sufficient reasons.

• Any arrears payment for past period paid to employees on that amount ESIC Contribution is not payable

For example: – In month of April 2012 a particular employee is earning salary/ wages
14000/- per month; but management has decided to increase the salary of that employee from
14,000/- per month of
16,000/- in month of August 2012 w.e.f. 1st April 2012, so in this case the company will pay arrears dues for the month of April, May, June, July, i.e.
2,000/- per month for 4 months i.e.
8,000/- on this arrears amount ESIC contribution is not payable, but in month of August 2012 Salary / Wages
16,000/- on that amount ESIC Contribution is payable till completion of Contribution period i.e. till September 2012

Notifications issued by different State / UT Governments under Section 1(5) of ESI Act, 1948 reducing threshold of coverage to 10 persons in their respective States / UTs.


Sr. No.

Name of State Govt./ UT

Gazette Notification No. & Date



Andhra Pradesh

178, Part-1, Extraordinary dated



No.F.21 (71) – LAB / ENF / ESI / 08 / 5740-43 dated 20-7-2011



No. ACS-01 / Ni-73 / 2010-65 dated 19-1-2011



No.12, F-10-28/2010/16 dated 4-3-2011*

Except Medical Institutions



Vol. LIII, Extraordinary No. GHR
– 2012-04-ESI -18-2011688529-M(3) dated 3-1-2012

Except Medical & Educational Institutions.



No. 10 / 162 / 2010. 5lab dated 6-9-2011


Jammu & Kashmir

SRO 80 dated 5-3-2012



133 Extraordinary No. 1653 dated



No. LD 323 LSI 2010 dated 16-3-2011



Vol. LVI SRO No.425/2011 dated


New Delhi

501, Extraordinary Part-II – Section-3-sub-section (ii) S.O.616 (E) dated



No. SS-II-SC-42/2011/7752/LE dated 24-8-2011



25 No. 7237 / Lab / K / 2010 dated 2-6-2011

Except Medical institutions.



Extraordinary No. 8/50/10-4HB4 / 2192 dated 14-7-2011.



Extraordinary, S.O. 546 dated 7-1-2011



Part-12, No.31, 641. VII /11-479 (ESI)/2003 dated 7-6-2011


West Bengal

Extraordinary, 10/2/2011, No. 131-SS/2H-6/05 dated 1-2-2011.



F 10-4/2011 / 16 dated 25-5-2011

Medical Institutions


Madhya Pradesh

F No. 9-1-2004 – B-XVI dated 19-5-2011

Educational & Medical Institutions



No. Dated 5-9-2012

Except education and Medical institutions


Tamil Nadu

No.II(2)/LE/52/2013 Dated: 2nd January, 2013

Except education and Medical institutions


ASSAM, H.P.,U.P., & Maharashtra.


1. Director Public Grievances,

ESI Corporation Panchdeep Bhavan,

Kotla Road, New Delhi.

Fax:- 011 – 23235481

• For any complaint / Grievance/ Suggestion related to ESIC

ESI Corporation, Panchdeep Bhawan,

Room No. 108, C.I.G Marg, New Delhi
– 110 002.

Phone Number:- 011 – 23237964; Fax:- 011 – 23234537



ESIC website: –;

This is my belief: that through difficulties and problems God gives us the opportunity to grow. So when your hopes and dreams and goals are dashed, search among the wreckage, you may find a golden opportunity hidden in the ruins.

– Dr. A. P. J. Abdul Kalam


Ramesh L. Soni



We are dealing in Wooden flooring material. We have appointed franchisees in various States and receiving non-refundable franchisee fees from them. We are attaching herewith two franchisee agreement formats, one for the year 2015-16 and other 2016 onwards for your kind perusal.

We require your valuable opinion whether this franchisee income will attract tax under MVAT Act in view of the Subway’s High Court judgment?


1. Before expressing our views on the query raised by you, we would like to bring to your kind notice some important observations of the Hon’ble Bombay High Court in Subway’s case.

2. The Court, in that judgment, has rejected the Revenue’s argument that the eligibility of VAT is to be determined by the State, and therefore, it could levy a sales tax on a transaction which already attracts Service Tax. The Court held that the decisions in BSNL, Imagic Creative, and Associated Lease Finance are exactly on the same issue. Service tax and Sales Tax are mutually exclusive of each other.

3. The Court said that the introduction of the word’franchise’ in the amended MVAT Act would have to be read to mean those franchises that can reasonably and plausibly be construed to have the effect of a sale; it cannot be widened to include agreement styled as’franchise agreement’ simply because of the nomenclature. The Court further said, indeed, it seemed to them clear that if they accept that the franchise agreement is, by definition one that requires territorial exclusivity, then the Subway’s Agreement was not franchise agreement at all, but purely licensing agreement. The Court found that Subway’s Franchise Agreement granted to the franchisee nothing more than mere permissive use of defined intangible rights. It is therefore a service, and not amenable to VAT. However, the Court also hastened to clarify that they were not determining whether any particular kind of arrangement was or was not a franchise.

4. Thus, the Court has held that the agreement between Subway and its franchisees is not a sale, but is in fact a bare permission to use. However, the decision of the Court is based on the terms of the agreement involved in Subway’s case. Some of the clauses of the agreement on which Court has relied are stated below:

A. The agreement between Subway and its franchisee was limited to the precise period of time stipulated in the agreement. At the end of the period of the agreement, or before in case there was any breach of its terms, the right of the franchisee to display the mark’Subway’ and its trade dress, and all other permissions would also end. On the basis of this clause in the agreement the Court held that there was no passage of any kind of control or exclusivity to the franchisees.

B. The Court relied on the definition of the word franchise stated in Blacks’ Law Dictionary and Chambers Dictionary.

Black’s Law Dictionary defines a franchise, in the context of a commercial transaction as:

The sole right granted by the owner of a trade mark or a trade name to engage in business or to sell a good or service in a certain area.

Chambers’ Dictionary too describes it as:

A commercial concession by which a retailer is granted by a company the exclusive right of retailing its goods in a specified area.

Relying on those definitions the Court observed that there is conceivably a class of franchise agreements that would have all the incidents of a’sale’ or a’deemed sale’ (i.e., a transfer of a right to use). However, the Court found, on facts, that the Subway franchise did not meet these tests.

C. There was no exclusivity. The agreement itself said that Subway might itself open and operate its own outlets in direct competition with the franchisee. The Court observed that the agreements themselves expressly contemplated that Subway might create further franchisee in the very area in which this franchisee operates. The franchisee could not unilaterally sub-franchise.

5. The Court considered these terms and held that the right of transferability was extremely restricted and was impossible without Subway control throughout. It said, similarly, if there was no requirement of having to cease display and use, or return the intangible property at the end of the franchise agreement’s term, then the transaction might arguably be a sale. It further observed, exercises in co-branding or sub-branding, where one party franchises its mark on a territorially- restricted basis and allows the franchisee to combine it with its own or other marks may also well have an element of sale. Similarly, where a dealership for, say, automobiles, has territorial exclusivity, then it may amount to a franchise. The Subway franchise model, the Court said had none of these elements. The so-called’system’ was controlled by Subway and it is exclusive to Subway. At the end of the franchise term, it cannot be used. Some (though not all) of the ingredients – breads, salad dressing and other’key’ items – were to be sourced from Subway or Subway-authorised vendors and nowhere else. The Court said, this gives Subway deep and pervasive control and dominion over the franchisee’s daily operations, without at the same time ceding to the franchisee the slightest hint or latitude in what it may do with the permitted marks and technology.

6. Here it should be noted that there were two petitions before the Court on the same issue. Monsanto India and the Subway were those two petitioners. Monsanto India supplies to third parties a certain type of hybrid cotton seed. This seed is impregnated with a proprietary technology (BT-infused seeds) that protects it against the boil-weevil, a known menace to cotton crops. From these hybrid seeds, these third parties then generate large quantities of sowable seeds, which they then sell to cotton farmers. Monsanto India itself sells nothing to end users. The process thereafter is as follows. Monsanto India enters into sub-licensing agreements ( The Licensor being Monsanto, USA) with other seed companies through which it claims to brand permissive use of technology via donor seeds. Monsanto India delivers fifty samples BT’donor seeds’ to the seed companies for BT cotton hybrid production, along with standard operating procedure (SOP) manual prepared by Monsanto USA. The seed companies produce or generate additional donor seeds from these given seeds. Monsanto India provides initial training to the seed companies to assist them in using the donor seeds and developing foundation seeds, which will enable them to eventually produce BT cotton hybrid. Monsanto India thereafter provides training to the seed companies to carry out the zygosity test, which tests the execution of breeding plan. The sub-lincensees are thereafter required to take approval from the concerned Ministry of the Government. Once such approval is obtained each sub-licensee can produce BT cotton hybread seeds. These BT cotton hybreed seeds are then sold to farmers. Under the sub-licensing agreement, Monsanto India receives consideration from the seed companies in the form of a one time fixed fee and a recurring variable based on the sale of the genetically modified seeds; in essence a trait fee.

7. The agreement of the Monsanto India provides for few restrictions on the seed companies: the technology is non-transferable, non-exclusive, and can’t be assigned except in the manner provided in the agreement. The seed companies can’t grant further sub-licences, and the sub-licensee is not permitted to reverse, engineer, modify or use the BT gene without the prior consent of Monsanto India. It was the claim of Monsanto India that such agreements fall within the ambit of permissive use rather than a transfer of right to use. They submitted that it was a service and not a deemed sale within the meaning of Article 366(29A) (d) of the Constitution of India.

8. The Court held the agreement of Monsanto is diametrically opposed to the Subway model because Monsanto India has no control whatever in what it’s licensee does with the BT- infused donor seeds. That licensee may choose not to use those at all. There is also no question of any in’return’ or’cessation’ to Monsanto India. The seed companies could do as they please with the seeds, they could alienate or even destroy them. Thus, the Court held that in Monsanto case there was transfer of right to use and therefore the provisions of the MVAT, 2002 were applicable.

9. The querist submitted with us two kinds of franchise contracts. The first one is named as agreement for annual franchisee contract and the second one is named as Memorandum of Understanding. We have examined these contracts keeping in mind the aforesaid observations of Hon’ble Bombay High Court in both the petitions. We found that many of the clauses such as duration of the franchise, control of the querist over the activities of the franchisee, termination etc. are similar to those in the Subway’s agreement. These terms clearly prove that the querist has granted to the franchisee nothing more than mere permissive use of its intangible rights and it is not a case of transfer of right to use. Therefore, in our view the querist is not liable to pay VAT.

10. We should also bring to the kind notice of the querist that certain, though few in number, clauses which were there in the Subway’s agreement and which were relied on by the Hon’ble Court for the purpose of the coming to the conclusion are missing in this agreement. We suggest that all new agreements of the querist should include those clauses.


Vinayak Patkar

Deduction for Sub-Contractor

Query: Recently Supreme Court has decided the treatment to be given to payments made to the sub-contractor. Whether because of said judgment the margin in the hands of main (principal) contractor will get excluded from levy of tax, particularly in relation to MVAT Act?

Reply: In relation to Works Contract a very peculiar situation arises. The contractee awards contract to the main contractor. The main contractor may sub-contract the same work to the sub-contractor keeping its margin in between. Main Contractor may not be using any of its goods in relation to margin retained by it. The issue is whether main contractor is required to discharge liability on such margin under Sales Tax Laws.

There can be debate on the issue as to whether there are two sales under Works Contract i.e. one from the sub-contractor to main contractor and another from main contractor to contractee. However, this issue has now been put to rest by the judgment of Hon. Supreme Court in case of
State of Andhra Pradesh vs. Larsen and Toubro Ltd. (17 VST 1)(SC). In this judgment Supreme Court categorically held that there is only one transfer of property that is from sub-contractor to the contractee.

The further issue is, what is the taxable quantum, in such type of situation. Since the transfer of property is by sub-contractor and main contractor is not using its own goods, which are getting transferred to the contractee, can it be said only price realised by sub-contractor is only taxable quantum and margin retained by main contractor is not liable to sales tax.

There is no direct answer in the above judgment. There is further recent judgment of Hon. Supreme Court in case of
Larsen and Toubro Ltd. vs. Additional Deputy Commissioner of Commercial Taxes and Ors. (Civil Appeal Nos. 2956 of 2007, 2318 of 2013 and 7241 of 2016 dated 5-9-2016)(SC). In this judgment, the issue was about computation of turnover for attracting turnover tax under the Karnataka Sales Tax Act. Hon. Supreme Court after referring to facts, observed as under:

“17. After bestowing our due consideration to the respective submissions, we find that the position taken by the assessee has to prevail, which appears to be meritorious. This result follows even from the bare perusal of the Karnataka Act and Rules. For this purpose, it becomes important to refer to Clause (c) of sub-rule (1) of Rule 6 of the Karnataka Sales Tax Rules, 1957. Rule 6 deals with determination of total and taxable turnover and Clause (c) reads as under:

6. Determination of total and taxable turnover.-
(1) The total turnover of a dealer, for the purposes of the Act, shall be the aggregate of –

xx xx xx

(c) The total amount paid or payable to the dealer as the consideration for transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract; and includes any amount paid as advance to the dealer as a part of such consideration.

xx xx xx

18. What is significant is that total amount paid or payable to the dealer as a consideration for 'transfer of property in goods', which is involved in execution of the works contract, is to be treated as 'total turnover'. This Rule, thus, specifically restricts the total turnover in respect of those goods, alone, where the property has been transferred. Thus, transfer of property in goods, becomes necessary event and unless there is a transfer of property, the amount paid is not to be included in the total turnover. The amount paid to the sub-contractor is not for transfer of property in goods. When matter is examined from this angle, the ratio laid down by this Court in the Andhra Pradesh judgment clearly applies in as much as in that case also the Court noticed that
Section 4(7) of the Andhra Pradesh Act indicated that 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. The Court held that the value of the goods which constitute the measure for the levy of tax is the value of goods at the time of the incorporation of the goods in the works. The Court further found that same was the position contained in Rule 17(1)(a) of the Andhra Pradesh Value Added Tax Rules, 2005.

19. It is not in dispute that the facts and the issue involved were identical, i.e. the assessee had assigned parts of the construction work to sub-contractors who were registered dealers. These sub-contractors had purchased goods and chattels like bricks, cement and steel and, where necessary, supply and erect equipments such as lifts, hoists, etc. The materials were brought to the site and they remain the property of the sub-contractor. The site was occupied by the sub-contractor and the materials were erected by the sub-contractor. In this backdrop, after taking note of some provisions of the Andhra Pradesh Act, the Court explained the legal position in the following manner:

16. By virtue of Article 366(29-A)(b) of the Constitution, once the work is assigned by the contractor (L&T), the only transfer of property in goods is by the sub-contractor(s) who is a registered dealer in this case and who claims to have paid taxes under the Act on the goods involved in the execution of the works. Once the work is assigned by L&T to its sub-contractor(s), L&T ceases to execute the works contract in the sense contemplated by Article 366(29-A)(b) because property passes by accretion and there is no property in goods with the contractor which is capable of a retransfer, whether as goods or in some other form.

17. The question which is raised before us is whether the turnover of the sub-contractors (whose names are also given in the original writ petition) is to be added to the turnover of L&T. In other words, the question which we are required to answer is whether the goods employed by the sub-contractors occur in the form of a single deemed sale or multiple deemed sales. In our view, the principle of law in this regard is clarified by this Court in Builders' Assn. of India as under: (SCC p. 673, para 36).

36 … Ordinarily unless there is a contract to the contrary in the case of a works contract, the property in the goods used in the construction of a building passes to the owner of the land on which the building is constructed, when the goods or materials used are incorporated in the building.

(Emphasis supplied by us)

18. As stated above, according to the Department, there are two deemed sales, one from the main contractor to the contractee and the other from
sub-contractor(s) to the main contractor, in the event of the contractee not having any privity of contract with the sub-contractor(s).

19. If one keeps in mind the above quoted observation of this Court in Builders' Assn. of India the position becomes clear, namely, that even if there is no privity of contract between the contractee and the sub-contractor, that would not do away with the principle of transfer of property by the sub-contractor by employing the same on the property belonging to the contractee. This reasoning is based on the principle of accretion of property in goods. It is subject to the contract to the contrary. Thus, in our view, in such a case, the work executed by a sub-contractor, results in a single transaction and not as multiple transactions. This reasoning is also borne out by Section 4(7) which refers to the value of goods at the time of incorporation in the works executed. In our view, if the argument of the Department is to be accepted, it would result in plurality of deemed sales which would be contrary to Article 366(29-A)(b) of the Constitution as held by the impugned judgment of the High Court. Moreover, it may result in double taxation which may make the said 2005 Act vulnerable to challenge as violative of Articles 14, 19(1)(g) and 265 of the Constitution of India as held by the High Court in its impugned judgment.

This raison d'etre shall apply, in full force, while answering the question even in the context of the Karnataka Act.â€

It can be seen that Hon. Supreme Court has directed not to consider the payments or value of the sub-contracted work for computation of turnover. From above judgment, no inference can be drawn that the margin of the main contractor is also not liable to sales tax. The margin in the hands of main contractor is also towards works contract execution. One school of thought can be that the margin is towards services only and hence no liability to VAT. The other school of thought can be that the margin consists of margin towards goods and labour which are two components of works contract. If, this theory is accepted, then, the margin in the proportion of goods will be liable to sales tax.

Even in general the contractee is paying to the main contractor towards goods and services acquired by it by awarding works contract to the main contractor. So that is the price which is liable to sales tax. However, for avoiding double taxation the deduction towards sub contractor is contemplated. This is also what comes out from above judgments of Hon. Supreme Court.

If this situation is applied to the MVAT Provisions, it can be seen that there is specific provision in relation to main contractor and sub-contractor.

Section 45(4) of MVAT Act provides as under:

“45. Certain agents liable to tax for sales on behalf of principal –

(1) to (3)

(4) Where any sale has been effected by way of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract and the contractor has executed the works contract awarded to him, through a sub-contractor, directly or otherwise, then notwithstanding anything contained in any law or agreement to the contrary, the relationship between the contractor and the person who has actually executed the works contract or part of it as a sub-contractor shall be deemed to be that of the principal and agent and accordingly,-…"

Thus, there is specific provision deeming both parties as one party. It can be said that the principle laid down by Hon. Supreme Court in above judgments is already implemented in MVAT Act. The works contract is deemed to be one transaction, executed by both together with contractee. The result is that the whole price received towards contract from contractee becomes the price for the contract and liability is required to be discharged with relation to such price. To avoid double taxation, deduction is already contemplated by providing Forms 406, 407, 408 and 409, as may be applicable.

It can also be noted that in Rule 58(1) also deduction is provided towards payment to sub-contractor.

Thus, it can be said that the principles laid down by Supreme Court are already in operation under MVAT Act. However, from the combined reading of all the provisions, it is difficult to say that the principal contractor will not be liable to VAT on the margin amount retained by the main contractor. Further analysis on this issue is possible, however all aspects are not discussed here for sake of brevity. As per present position under MVAT
Act, the margin is liable to tax in the hands of main contractor


Query No. 1: (Wakf and Religious Endowment)

Please throw some light on “Muslim Wakfs” and “Religious Endowments under the Hindu Law” as one of the charitable purpose as there are no judicial decisions covering the said topic that have come to our notice.


Mulla’s Mohammedan Law defines Wakf as “Wakf means the permanent deduction by a person professing the Mussalman faith of any property for any purpose recognised by the Mussalman Law as religious, pious or charitable.”

Mohmmedan Law realises “religious, pious or charitable” purposes for a valid Wakf. The following have been held to be valid objects:

1. Mosques and provisions for imams to conduct worship therein;

2. Educational institutions;

3. Aqueducts, bridges and care caravansaries;

4. Distribution of alms to poor persons and assistance to poor to enable them to perform the pilgrimage to Mecca;

5. Celebrating the birth of Ali Murtaza;

6. Facilitating religious rites in the month of Muharram, and provisions for camel and duldul for religious of immambaras;

7. Repairs of immambaras;

8. The maintenance of a Khankah;

9. Celebrating death anniversaries (barsi) of the settler and the members of his family;

10. Performance of ceremonies known as Kadam Sharif;

11. Burning lamps in mosques;

12. Reading the Koran in public places and also at private houses;

13. Performance of annual fateha of the settler and of the members of his family. The ceremony of fateha consists in the recital of prayers for the welfare of the souls of deceased persons, accompanied with distribution of alms to the poor;

14. The construction of a robat or free boarding house for pilgrims of Mecca,

15. Maintenance of poor relations and dependents;

16. Payment of money to fakirs i.e. poor;

17. Grant to an Idgah;

18. A durgah or shrine of a pir which has long been held in veneration by the public.

Similarly, endowment is the dedication of property by gift or device to religious or charitable uses. An endowment has to be certain both to the subject and the object. A dedication of property to an endowment may be partial or complete when the property is dedicated absolutely and no person has any beneficial interest therein.

A religious endowment is one which has for its object the establishment, maintenance or worship of an idol or deity or any object or purpose subservient to religion. A charitable endowment is one which has for its object the benefit of the public or a mankind.

Query No. 2: [Difference between Explanation to Sections 11(2) and 11(3)]

What is the difference between the explanation given under Sections 11(2) and 11(3)?.


Explanation below Section 11(2) provides that any amount paid or credited out of income from property held under wholly charitable trust or partly charitable trust which is not applied but accumulated or set apart to any trust or institution or to any fund either during the period of accumulation or thereafter shall not be treated as application of income for charitable or religious purposes. Thus, payment to other trusts and institutions out of income from property held under trust in the year of receipt will continue to be treated as application of income. However, any such payment out of accumulated income shall not be treated as application of income and will be taxed.

While Section 11(3) provides that if in any year the income which is accumulated for the specified purpose or purposes of the trust is applied to purposes other than charitable or religious purpose or ceases to be accumulated or set apart for such application to such purposes, it will become chargeable to tax as the income of that year. Further, if in any year, the accumulations cease to remain invested in Government securities or other approved securities or deposited in any account in the Post Office Savings Bank or with a banking company, co-operative bank etc.; or with a financial corporation, then also the income so accumulated will become chargeable to tax as income of that year. It further provides that if accumulations are not utilised for the specified purposes during the period of accumulation or in the year immediately following the expiry of that period, then, the accumulations to that extent they are not so utilised, shall be chargeable to tax as income of the previous year immediately following the expiry of that period.

Query No. 3: (Benefit of indexation to Charitable Trust)

Section 11(IA) is not meant for calculation of capital gains tax but is to operate after capital gains are worked in accordance with the provisions of Sections 45 to 55
[Akhara Ghamanda Dass v. Asstt CIT [68 TTJ 244 (Asr)]

In the light of above, whether a charitable trust will get the benefit of indexation?


Yes, Explanation (ii) to this sub-section provides that “cost of the transferred asset” means the aggregate of the cost of acquisition (as ascertained for the purposes of Sections 48 and 49) of the capital asset which is subject to transfer and cost of any improvement there with the meaning assigned to that expression in Section 55(1)(b) of the Act.

Further, second proviso to Section 48 provides that where long term capital gain arisens from the transfer of a long term capital asset, other than capital gains arising to non-resident from the transfer of shares in, or debentures of an Indian company referred to in the first proviso, the provision of clause (ii) [i.e. the cot of acquisition of the asset and the cost of improvement thereto] shall have effect as if for the words “cost of acquisition” and cost of any improvement the words “indexed cost of acquisition” and “indexed cost of any improvement had respectively been substituted.

Thus reading the above, it is clear that capital gains has to be calculated by the assessee including trust as Per provisions of Section 45 to 55 of the Income tax Act, 1961. This is also supported in para 14 of
Akhara Ghamanda Das v. ACIT [114 Taxman 27 (Asr)],
which reads as under:

“In fact this section is to operate after capital gains are worked in accordance with Chapter E of the IT Act. This gives an additional benefit to the appellant, if, he has to make a claim that income arising out of capital gains is to be exempted under section 11(1) then he has to fulfil various conditions mentioned in section (1A).”

Query No. 4: (Taxability of Charitable Trust in case exemption is forfeited)

In case of violation of Section 13(1)(c) or 13(1)(d) what are the repercussions and how the tax is calculated in above situations as there is some confusion in that?


Section 164(2) of the Income-tax Act, 1961 provides that in case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, tax shall be charged on so much of the relevant income as is not exempt under Section 11, as if the relevant income not so exempt were the income of an association of persons.

Proviso to the said sub-section provides that in case where the whole or any part of the relevant is not exempt under section 11 by virtue the provisions contained in clause (c) or clause (d) of Section 13(1), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate.

The CBDT vide circular No. 387 dated July 06, 1984 has clarified the legal position as regards the taxability of the income of a charitable or religious trust forfeiting exemption by virtue of the investments made not in conformity with the prescribed pattern under Section 13(1)(d) or the income being spent on any of the persons excluded under Section 13(1)(c) of the Income tax Act. The CBDT has interpreted the proviso to Section 164(2) and Section 164(3) to mean that, in the case of trusts contravening the provisions of Section 13(1)(c) and (d) “the maximum rate of income tax will apply to that part of the income of which has forfeited the exemption under the said provisions.”

Query No. 5: (No threshold limit if exemption is forfeited)

If a Section 25 company is registered as charitable trust whether threshold limits of
2,50,000/- will be available to the company as charitable trusts are assessed as AOP? Similarly what will be the threshold limit applicable in case a society is registered as charitable trust?


Income derived by charitable or religious trust is exempt from tax to the extent to which such income is applied to charitable or religious purposes or is accumulated or set apart, in accordance with the provisions of Income-tax Act, for application to such purpose.

Charitable or religious trust loses the exemption if any part of the income or any property of the trust is used or applied during the relevant year, directly or indirectly for the benefit of specific categories of persons or trust fund is invested in contravention of the investment pattern for such funds as laid down under the Act.

If the whole or any part of the income of a charitable or religious trust is not eligible for exemption in the circumstances mentioned above tax is charged on such income at maximum marginal rate applicable to individuals, AOP, etc. without threshold limit.

Parliament has now passed the 122nd Constitution Amendment Bill and the requisite number of State Legislatures are set to ratify the Bill by the 30th of August. GST will subsume Sales Tax (VAT), Service Tax, Excise and a host of other levies and turn India into a single unified market.

The Model GST Law has also been in the public domain for quite some time, and has indeed undergone some revision in June 2016. The Model Law is a sort of preliminary draft that the Empowered Committee have released for public comment. Herein-below are some of the potential issues that the authors feel would arise out of the provisions contained in the Model Law when they are sought to be applied to financial supplies. A word of caution: the views expressed herein are extremely generalized and should not be taken as a specific comment on any fact situation.

Supplies of Money

The taxable event under the GST law is a “supply made for consideration”, the supply being either of goods or services [Section 3 of the Model GST Law]. The terms “goods” as well as “services” are defined in Sections 2(48) and 2(88) respectively, and both have fortunately excluded “money”. The supply of money is thus completely outside the purview of the GST law.

Money is defined under Section 2(68) as:

(68) “money” means Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any such similar instrument when used as consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value;

This definition of money is a very wide one, much wider than what Courts consider to be the ordinary meaning of money. In context of the European Union Value-Added Tax law (one of the sources of our GST law), Bitcoin has been held to be “currency” on the premise that Bitcoin has no other purpose to serve except as a means of payment. [Skatteverket vs. David Hedqvist (Judgment dated 22nd October 2015 in Case No. 264/14)]. Even in the United States, Courts have held that Bitcoin is equivalent to money.

It is not clear whether, under the Model Law, digital currencies will qualify as “electronic remittance” given the context in which this phrase appears. Similarly, the words “similar instrument” also leaves much to be desired as far as digital currencies are concerned. It would be better if specific details were added to this definition with respect to digital currencies.

Furthermore, the exact purport of this exclusion of money from the definition of “goods” and “services” is not known as of now. It may be similar to what was known as “transactions in money” which were kept outside the definition of “service” in the Service Tax law. But what should happen if the dominant intention of parties was that A should supply money to B and such supply will create some incidental benefits or rights in hands of A (those benefits/rights being reducible to monetary value)? Will the transaction be a supply of money by A to B which is outside the scope of the GST law or will it be a supply of benefits/rights by B to A, with the supply of money being mere consideration for supply of the said benefits/rights? Will dominant intention of parties matter in such a case? Is the incidental nature of those benefits or rights even relevant? Some clarity is required from the Empowered Committee in this regard.

However, it is trite that supply of money will not include a supply in relation to money. Thus, where a service provider is engaged to transport money to and from a bank, the services cannot be said to be a supply of money. Such supplies will not escape taxation.

Credit arrangements

VAT/GST jurisdictions outside exempt the supply of loans and advances as well as interest earned on such loans and advances on the principle that the same are in the nature of supply of money. As a matter of law, interest is sometimes said to be consideration for the loan of money, at times being equated to hire charges for the lease (bailment) of goods. It is only because of the nature of the thing, that money cannot in any real sense be “hired” or “leased”. Property in the money passes the minute it changes hands, even if it is by way of a loan. All that the lender then is left with is an actionable claim that is known as “debt”.

The service tax law specifically included in the Negative List ““ and thus exempted – the extension of loans where the consideration was represented by interest. This was done despite the fact that “transactions in money” were kept outside the remit of definition of service. It is unclear whether the Empowered Committee have deliberately not included any similar specific exemption for making of loans in the Model GST Law. Though it is quite probable that extension of loans will still be outside the GST Law, being in essence a supply of money, some clarification in this respect is desirable, given the importance of the credit sector to our economy.

Issue of Securities

Securities have been specifically included in the definition of “goods” under the Model GST law. This is in contrast with the practice under Sales tax laws to exclude shares and securities from the definition of “goods”. The practice in Sales Tax evolved due to the reluctance of the Constitution makers to allow the many States to burden the financial markets with their respective sales tax levies. Though no such specific injunction was finally put in the Constitution, our States have always followed that tradition. The Model Law will now allow the States to make a departure and tax transactions in securities.

Since securities have been included in the definition of “goods”, Place of Supply provisions relating to goods are relevant. Place of Supply provisions are important, since Parliament is Constitutionally empowered to fix the situs of supply through such Place of Supply provisions which will act as a bar to States trying to tax supplies whose situs is outside the State. These Place of Supply provisions, so far as they relate to goods, have drawn a distinction between supplies of goods which involve movement of goods and supplies which do not involve movement of goods. Securities in physical form can be dealt with under the “movement” category. In fact, there are precedents from the United States Supreme Court considering the movement of physical securities from one state to another sufficient to place them under the inter-state commerce clause protection.

For supplies of goods which do not involve movement of the goods, the Model Law says that the Place of Supply is the location of the goods at the time of delivery to the recipient. This rule will create abnormalities when applied to shares stored in demat form.

It also seems that issue of shares for raising capital may also be taxable under the Model law. The European Court of Justice has struck down such attempts by member-countries on the principle that this violates the principle of a value added tax as a consumption tax. However, in India it may be possible that a potential shareholder who only supplies money (or capital) to the company in return for a owning a part of the company will be called upon to pay GST on such a supply.

Non-monetary consideration

The Model Law does not merely tax supplies which are made for monetary consideration. It also takes in supplies which are made for other than monetary consideration. Issues will crop up with respect to taxation of bond swaps etc. In such cases, as in all cases of non-monetary consideration, both parties will be liable to pay GST on their respective supplies.

Benefits related to bank accounts

Banks and financial institutions are known to give certain benefits to customers who open accounts in those banks or open accounts under certain schemes/categories. These benefits are mostly in the nature of free supplies. Now, the Model GST Law contains contradictions on whether or not consideration is required for a supply to be taxed. Even though the levy is on a “supply made for consideration”, the charging provision goes on to say that certain supplies without consideration will still be taxed. These supplies are listed out in Schedule I, which states that a supply will be taxed irrespective of whether it is made for consideration or not.

It is expected that the Empowered Committee will take a final view on whether or not they want to make the requirement of consideration a cornerstone of the levy. They can decide that the levy should apply to all supplies even if they are free supplies. The pitfalls are severe, particularly in the context of the wide remit of the term “supply” which includes “tolerance, obligation to act, refraining from act” etc. In fact, it is possible that every small restriction or obligation under the contract for maintaining an account may be characterized by the Tax department as a supply even though it never concerned the customer. The Valuation rules may then be invoked to value each such alleged supply separately.


All in all, the Empowered Committee have to come out with a more clearer regime for financial supplies, including those for guarantees, indemnities etc. In fact, other jurisdictions have lengthy provisions which lay down rules for all sorts of transactions concerning the financial sector. If the Empowered Committee were to leave these matters to be decided by the various States and the Union without any guidance in this behalf, taxation of financial supplies will likely descend into a chaos similar to what we have seen in sales tax regime, with each state pulling in a different direction. Given the nature of operations of financial sector, this would be something which would ultimately undermine the efficacy of the Goods and Services Tax regime in the long run.


Vinayak Patkar and Ishaan Patkar