Supply of Tangible Goods for Use – Should one pay Service Tax or VAT?!!
-CA Vineet Surana
FCA,MBA(F),DISA(ICAI)
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A persistent argument in indirect taxes is that of double taxation of a single transaction. The dispute between state and central taxes arises because a particular transaction is both deemed to be a supply of goods, in terms of the State sales tax/value added tax definitions, as also a provision of services, under the service tax law.
However, the Supreme Court, in its decision in Bharat Sanchar Nigam Ltd Vs UOI [(2006) 145 STC 91], had held that double taxation was impermissible and that transactions could only be charged to one of the two taxes and not to both.
Finance Act 2008 has introduced, a new category of service which would be subjected to levy of service tax and it is categorized under supply of tangible goods for use. This category has been introduced with effect from 16.05.08 and is another instance where a transaction of supply of goods is sought to be subjected to service tax levy. The intention here seems to be to tax such supply of goods where no VAT/sales tax is levied/ leviable. This has been clarified by the departmental letter F.No. 334/1/2008 TRU dated 29.02.08 which goes to the extent of saying that transaction of allowing another person to use the goods without giving legal right of possession and effective control which is not treated as a deemed sale of goods is treated as a service, thereby deeming such transaction as one amounting to service. One would have to analyze each case ( agreements, invoices, conduct of parties etc.) to find out whether there is transfer of possession and effective control as it would determine whether the transaction is to be taxed as one of sale, or one of service.
Definition
As per Section 65(105)(zzzzj) of Finance Act,1994 as amended, defines taxable service means any service provided or to be provided to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances. The section reads as follows:
Taxable Service means services provided or to be provided:
“to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances;”;
Thus if one purely goes by the definition, it may also be possible to argue that what is liable is service in relation to supply of tangible goods without transferring right of possession and effective control of such machinery and not the supply itself, though the intention of revenue as evidenced by the departmental letter, is different.
The term “tangible” would have to be seen in light of the meaning assigned by English Dictionary. As per Random House Webster’s Unabridged Dictionary, tangible means capable of being touched or discernible by the touch and is the attribute of being detectable with the senses. The goods being supplied should be tangible goods i.e. having physical existence and form in order to attract liability under this category. In other words intangibles would not be covered under this category at all and the taxability of the same would have to be seen under the old category of Intellectual Property Services since this service category specifically deals with tangible goods.
The word supply need not necessarily indicate transfer of the right of possession or effective control over the goods/materials in question. In order to make a transaction of supply of tangible goods not liable under this category, there should be a transfer of both possession as well as effective control over the said goods, to the user. The presumption here seems to be that VAT/sales tax is levied in cases where both right of possession as well as effective control over the goods is transferred to the user. The risk and reward of ownership would lie with the person who enjoys the possession.
From the above section there are 3 features which come to notice:
1. The service essentially has to be in relation to supply of tangible goods to any person by any other person;
2. There must not be any transfer of right of possession of the goods from the service provider to the service recipient;
3. There must not be any transfer of effective control of the goods from the service provider to the service recipient.
Hence if the above 3 feature’s are fulfilled in a commercial transaction than the same would be liable to service tax from 16.05.2008.
Illustration
A company is providing computers on rental basis to its clients for a period of 12 months for a consideration of Rs. 5000 per computer per month. Here the company has supplied/provided computers on rent and computers are goods but as can be noticed that the owner of computers has also parted with the right of possession and effective control in favour of the user because the user will be having unchecked – unhindered possession of the computers. So the above transaction satisfies only 1 criteria out of the 3 mentioned above and therefore the same would NOT be liable to service tax.
But imagine in the same transaction if the computers are supplied alongwith manpower to help the user use them and has stipulated in the contract that no one other than his personnel would use those computers – in other words the owner company is providing computers as well as manpower to operate under one single contract than in that case it can be safely said that all the three features are fulfilled and the transaction shall become taxable from 16.05.2008
Other issues
Where services are provided and tangible goods are also supplied for use, the nature of services provided would assume significance especially under service tax where the services provided are taxable services. For instance, if site formation services are provided along with supply of excavators, and such supply is part and parcel of the contract for service, then the charges for site formation related work would be taxed under the head site formation services under service tax. The assessee would have to then analyze whether the usage of excavator amounts to transfer of right to use goods to the client/customer. Where it does not, the charges for the same would have to be subjected to service tax. The classification of the service would be done using the basic principles of classification under service tax.
The issue of whether a transaction where the right of possession and effective control is not transferred is taxable under service tax law has been discussed in relation to certain other definitions of taxable services as well, such as ‘rent a cab’ operator services as well as ‘intellectual property services’. In relation to rent a cab operator service, the key words are with regard to the ‘renting of a cab’.
In a situation where cab services are procured without the control and possession of the cab being transferred to the user, the question was whether the definition would apply at all. As regards intellectual property services, the issue is slightly more complicated as it extends not only to temporary transfers but also to transactions whereby the use or enjoyment of an intellectual property right is permitted.
Exemptions
The supply of goods carriage to a Goods Transport Agency for carriage of goods by road liable under GTA service, without transferring the right as to possession and effective control, has been exempted under notification 29/2008 ST dated 26.06.08. The usage of the vehicle should be by the said GTA.
Conclusion
There have been several instances where the application of these other definitions has been seriously disputed, in the absence of a ‘transfer’ of the underlying goods. However, with the introduction of the definition of supply of tangible goods services, it clearly is the position that in all such instances the service tax will now apply. The VAT will not apply and thus only the one indirect tax will be charged.