If a transaction is deemed sale or a service is a question of fact. Mere filing service tax returns or service tax payment not conclusive of the true nature

Whether a transaction is a deemed sale or a service is a question of fact and would have to be determined in appropriate proceedings. This has been held by the Delhi High Court In a recent judgment. It also observed that mere fact of filing service tax returns and payment of service tax may not be determinative of the true nature of the transaction and VAT authorities cannot be precluded from independently examining the transactions in question.

Case Law Details:
W.P.(C) 1625/2014 & CM 3374/2014
TIM Delhi Airport Advertising Pvt. Ltd. (Petitioner) vs. Special Commissioner-II, Department of Trade & Taxes and ORS
Coram: Justice S. Muralidhar and Justice Vibhu Bakhru
Date of Judgment: 02/05/2016

Important Case Law referred:
Upasana Finance Ltd. v. State of Tamil Nadu and Anr.: (1999) 113 STC 403
Selvel Advertising Private Limited v. Commercial Tax Officers, Alipore Charge: (WBTT) (1993) 89 STC 1
Bharat Sanchar Nigam Ltd. v. Union of India: 2006 (3) SCC 1

Brief Facts of the Case:
The Petitioner company had filed a petition under Articles 226 and 227 of the Constitution of India, challenging the assessment of its entire turnover to Value Added Tax (VAT) for the period 2010-11 and 2011-12 and levy of penalty and interest thereon. The Petitioner impugned the order of Special Commissioner (VAT) directing a deposit of 20% of the disputed demand of VAT and interest as a pre-condition for hearing the objections filed by the Petitioner in respect of demand raised for FY 2011-12

The demands raised against the petitioner were a direct consequence of a ruling dated 6th April, 2011 made by the Commissioner (VAT) under Section 85 of the Delhi Value Added Tax Act (Act), 2004 whereby the Commissioner held that advertisement hoardings, panels, display boards, kiosks etc. are “goods‟ as defined under Section 2(m) of the Act and the advertisers were liable to pay VAT on the revenue received on account of deemed sale resulting from transfer of the right to use the said hoardings, panels, display boards, kiosks etc. The Commissioner relied on the decision of the West Bengal Tax Tribunal in the case of Selvel Advertising Private Limited (supra) and the decision of the Tamil Nadu Taxation Special Tribunal in Upasana Finance Ltd. (supra) wherein the Tribunals had held hoardings to be goods and letting of such hoardings as constituting a transfer of rights to use goods and thus, exigible to sales tax as a deemed sale

Thus the The principal controversy involved in this case was whether the Petitioner, who was a licensee in respect of certain advertisement display sites (‘the Sites’), would be liable to pay VAT on the revenue earned from display of advertisement at the Sites. According to the Petitioner, the Sites are being used by the Petitioner itself for rendering services and there is no transfer of any right to use those sites as alleged by the Revenue. The Revenue, on the other hand, contends that the Sites for display of advertisements are “goods‟ and the Petitioner has transferred the right to use those goods to various advertising agencies/advertisers, who use the Sites for display of their advertisement and/or advertisements of their clients.

According to the petitioner, the Sites were located within or in the vicinity of the Indira Gandhi International Airport, which was a secured area, and as such, access to the Sites is highly restricted. As per business model the petitioner enters into agreements with various persons including advertisement agencies in terms of which the advertisement content and/or advertisement material was provided by the advertiser. The Petitioner then printed and mounted the advertisement at the Sites and was remunerated for the same.

Important Excerpts from Delhi High Court Judgment:

At the outset, we must state that the question whether the levy of service tax and VAT/Sales Tax are mutually exclusive, is no longer res integra.

……. if a transaction has been held to be one of providing services then the same would not be chargeable to VAT. The dominant object of the transaction (other than those deemed to be divisible under Article 366 (29-A) of the Constitution of India) would be determinative of the nature of the transaction and consequently, dispositive of the question whether the same could be assessed as a ‘sale’ within the meaning of Section 2(1)(zc) of the DVAT Act.

In Bharat Sanchar Nigam Ltd. (supra) the Supreme Court had explained that to constitute a transaction of transfer of a right to use goods, the transaction must have the following attributes:
“(a) There must be goods available for delivery;
(b) There must be a consensus ad idem as to the identity of the goods;
(c) The transferee should have a legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;
(d) For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statute – viz. a “transfer of the right to use” and not merely a licence to use the goods;
(e) Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”

Clause (vi) of Section 2(1)(zc) of the DVAT Act is identically worded as clause (d) of Article 366 (29-A) of the Constitution of India. It is important to note that under the expanded scope of „tax on the sale or purchase of goods‟, tax on transfer of the right to use goods has been included; this is not the same as a tax on the use of goods and the two expressions cannot be read synonymously. Therefore, for a transaction to fall within the meaning of Section 2(1)(zc)(vi) of the DVAT Act, it is necessary that there should be a transfer of the right to use.

It is also relevant to state that a transfer of the right to use goods also entails delivery of the goods in question. In Bharat Sanchar Nigam Ltd. (supra) the Supreme Court opined that “….the essence of the right under Article 366(29-A)(d) is that it relates to user of goods. It may be that the actual delivery of the goods is not necessary for effecting the transfer of the right to use the goods but the goods must be available at the time of transfer, must be deliverable and delivered at some stage. It is assumed, at the time of execution of any agreement to transfer the right to use, that the goods are available and deliverable. If the goods, or what is claimed to be goods by the respondents, are not deliverable at all by the service providers to the subscribers, the question of the right to use those goods, would not arise.” In the present case, it is not disputed that the Sites in question are located in a restricted area and none of the advertisers have an unmitigated access to those Sites; the Petitioner affirms that possession of the Sites is retained by DIAL. In the circumstances, it would be difficult to accept the view that the transactions entered into by the Petitioner with the advertisers constituted transfer of the right to use the Sites in question. 

In the case of Upasana Finance Ltd. (supra), the Tamil Nadu Taxation Special Tribunals had itself clarified that it would have to be found on facts “whether a person who erects the hoardings only lets on hire the hoardings for display of advertisements or whether he also undertakes the job of designing the advertisements and painting the hoardings. Even here the two transactions are clearly separable. For the hire-charges of the hoardings, the person who erects is certainly liable to be taxed under section 3-A. This will depend upon the facts of each case.” Clearly, the question whether a transaction entails transfer of the right to use would have to be examined by ascertaining the true nature and intention of the parties and whether the necessary ingredients of sale are present.

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