Establishing intent is the key to understanding double taxation
October, 29th 2008
The previous article on double taxation concluded with the point that the decision of the Supreme Court in Bharat Sanchar Nigam Limited Vs Union of India (2006(2) S.T.R 161 (S.C) had held that the problem of double taxation, which was impermissible under indirect tax law, was to be addressed through appropriate means of determination of the intent of the contracting parties as to whether they wished to engage in supplies of goods or in provision of services.
Once the intent was determined, the transaction would be charged to just the one tax, either the goods tax or the service tax.
In the above case, the Supreme Court had to decide on the appropriate taxability of a SIM card used in cellular telephone instruments and it held as follows:
If the SIM Card was not sold by the assessee to the subscriber but is merely part of the services rendered by the service providers, then the SIM card cannot be charged separately to sales tax. It would depend ultimately upon the intention of the parties (emphasis supplied).
If the parties intended that the SIM card would be a separate object of sale then it would be open to levy sales tax thereon. However, if the sale of the SIM card is merely incidental to the service being provided and only facilitates the identification of the subscriber, it would not be liable to the sales tax.
The Central Excise and Service Tax Tribunal had occasion to consider just such instances of potential double taxation and has accordingly determined the appropriate tax to be paid. Most of these decisions are rendered with regard to taxability of SIM cards but the point is that these decisions have arrived at interesting conclusions as to how the intention of the parties to the contract, which gives rise to such potential double taxation, is required to be determined.
In the case of Idea Mobile Communications Ltd. Vs. Commr. of C. Ex. (2006(4) S.T.R 132), the Tribunal held that where the assessee has paid the sales tax on the sale of SIM card to the subscriber, no service tax could at all be charged.
The Tribunal held that if the assessee has not challenged the levy of sales tax and has paid the said tax, it followed that the parties to the contract understood it to be a sale of goods. Consequently, no service tax would be charged with regard to such sales of goods.
In this particular case, the Tribunal referred to another judgement of the Supreme Court in the case of Gujarat Ambuja Cements Ltd. Vs. UOI [2006 (3) S.T.R (608) (SC)], which had held that mutual exclusivity, as reflected in Article 246(1) of the Constitution, was to be understood as requiring that either the goods or the services taxation do not intrude into the domain of the other.
In BPL Mobile Communications Ltd. Vs. Commissioner of C. Ex. (2007(7) S.T.R 440), the Tribunal, following the Idea Mobile case, held that the fact of payment of sales tax on SIM cards by the cellular telephone service provider meant that the contract of provision of such service, in so far as it related to the SIM cards, was one of sale of goods and the parties intended that SIM cards be so sold. Accordingly, the Tribunal set aside the charge of service tax on the sale of SIM cards.
In yet another relatively recent case in RPG Cellular Services Ltd. Vs. Commissioner of C. Ex. (2008(10) S.T.R 298), the Tribunal, following the BPL Mobile case, held that the intent of the parties was to be judged by the relevant taxes that had been paid on the goods.
In this particular instance, the SIM cards were imported and customs duties had been paid thereon. In addition, sales taxes had also been paid on such SIM cards at the time of the transaction relating to the sale of cellularphones. The Tribunal held that the very fact of payment of customs duties on importation of SIM cards meant that the customs authorities had also accepted that SIM cards to be goods. Further, the subsequent payment of sales tax also meant that it was treated as goods under the Sale of Goods Act. The Tribunal held on these facts that service tax could not be charged on sale of SIM cards.
In a case related to a service other than cellular phone services, the Tribunal, in ASL Motors Pvt. Ltd. Vs. Commr. of C. Ex. & Service Tax (2008(9) S.T.R 356) has held that the charges for servicing of motor vehicles, recovered by the dealers from the customers as part of the price of the motor vehicles sold to the customers, could not be further charged to service tax.
It was argued, with success, in this case that since sales tax had been paid on the motor vehicle, it had to be held that the parties intended only to sell and buy of goods i.e. motor vehicles, and the intent was, therefore, not to provide any after sale service, notwithstanding that the costs of such services were imbedded in the consideration paid for the motor vehicles.
The Tribunal held that the provision of free services was, therefore, merely incidental to the sale of cars and was only undertaken to promote such sale. Therefore, no service tax could be charged in regard to sale of such motor vehicles, notwithstanding that there was aheading of Authorised Service Station Service under service tax law.
The interesting point to be noted in regard to these cases is that the fact of payment of sales tax on SIM cards or motor vehicles was held to be adequate evidence of the mutual intention of the parties to carry out sale of goods in relation thereto. In all these cases, the department attempted to argue that the intent of the parties could not be ascertained merely by the fact that sales tax had been paid on the goods.
The departments case was that sale of SIM cards, for instance, was incidental and ancillary to the provision of cellular phone service and it was in this manner that the transaction was commonly understood. However, the Tribunal has held that the intent was adequately established by the payment of sales tax and there was no further need, post this fact, to identify and determine the intent.
The point to be noted is that the Supreme Court, in the BSNL case, had not laid out any guidelines or rules as to how the intent of the parties was to be determined so that the relevant and appropriate singular indirect tax was charged. The Tribunal, in the cases referred to above, following the BSNL judgement, determined the intent of the parties going by the fact of payment of one tax i.e. sales tax and consequently held that no service tax would, therefore, be charged in that regard.
There does not appear to be, as yet, any decision where there has been a challenge to the sales tax or VAT to a particular transaction on the basis that service tax has already been paid in relation to the underlying transaction. However, given the clear and unambiguous position today that double taxation does occur in regard to several situations, particularly in regard to transfers of the right to use goods as well as on licensing of IPR as also of software, it is only a matter of time before such a decision comes about.
It would be interesting to see as to whether the Sales Tax or VAT Tribunal also follows the rationale followed by the Service Tax Tribunal in regard to the above cited cases and comes to similar conclusions that no sales tax/ VAT ought to be charged if the parties to the contract have already discharged the service tax. It will also be interesting to see whether, if challenged, these decisions of the Tribunal are subsequently upheld by the High Court and, possibly, by the Supreme Court.