One Transaction – Many Taxes:

The continuing tussle between

the States and the Centre to levy
taxes on certain transactions

Sujit Ghosh
Advocate, Delhi High Court

Partner & National Head

Tax Litigation & Controversies
Agenda

1 3

Transactions-Levy of tax by Centre

Aspect Theory
and State
Renting of Immovable
A
property
Hiring, leasing and licensing of
B
goods
Software development/
C
licensing of software

D Works contract
2

E Catering contracts
List of Taxes- Centre
Broadcasting services by DTH
and State Levy F
Operators

1
Aspect theory

Article 246- Distribution of legislative power between the Centre and State.
List I- Parliament has the exclusive power, List II- State has the exclusive power
List III- Areas on which both state and Parliament can make laws

Aspect theory:
Wherever legislative powers are distributed between the Union and the States, situations may
Subjects which
arise whereinthe one twoaspect and for
legislative one
fields purpose
might fall within
apparently the power
overlap. It is the of a particular
duty of the Courts,
however
legislature maydifficult it may be,
in another to ascertain
aspect and fortoanother
what degree and tofall
purpose what extent,
within the authority
another to deal
legislative
with matters falling within these classes of subjects exists in each Legislature and to define, in
power.theThe law 'with
particular case respect to' a
before them, thesubject
limits of might incidentally
the respective powers.'affect' another
It could not subject
have been the
in some way;that
intention buta that is should
conflict not the same
exist; and,thing astothe
in order law such
prevent being on the
a result thelatter subject.
two provisions
must be
There might be read together, and
overlapping; butthe
thelanguage of onemust
overlapping interpreted, and, where
be in law. necessary
The same
modified by that of the other
transaction may involve two or more taxable events in its different aspects- But the fact
Federation of Hotels and Restaurants Association of India v. UOI , 1989 (3) SCC 634
that there is an overlapping does not detract from the distinctiveness of the aspects
Payments of service tax and VAT are mutually exclusive. They should be held to be applicable
having regard to the respective parameters of service tax and the sales tax as envisaged in a
composite contract as contradistinguished from an indivisible contract. It may consist of
different elements providing for attracting different nature of levy. :
Imagic Creative Pvt. Ltd. v. Comm. Of Commercial Taxes, 2008 (9) S.T.R. 337 (S.C)

2
Agenda

1 3

Transactions-Levy of tax by Centre

Aspect Theory
and State
Renting of Immovable
A
property
Hiring, leasing and licensing of
B
goods
Software development/
C
licensing of software

D Works contract
2

E Catering contracts
List of Taxes- Centre
Broadcasting services by DTH
and State Levy F
Operators

3
Agenda

1 3

Transactions-Levy of tax by Centre

Aspect Theory
and State
Renting of Immovable
A
property
Hiring, leasing and licensing of
B
goods
Software development/
C
licensing of software

D Works contract
2

E Catering contracts
List of Taxes- Centre
Broadcasting services by DTH
and State Levy F
Operators

4
Renting of Immovable Property

Renting of Immovable
Property- leviable to
service tax under the
Finance Act ( List I)
Immovable Property

Leasing of Immovable
Property- leviable to stamp
duty ( List II)

5
 Litigation-Renting- Tax on Land and Building?
• Notification and circular taxed immovable • It is merely a property transaction. There is no
Home Solutions
Retail India Pvt. Ltd. • Tax on land and building under Entry 49
v. UOI
• Renting does not entail any value • The Court did not go into the argument of ‘tax on
158 (2009) DLT 722 (DB)
Retailers Association
of India v. UOI
(2011) 44 VST387 (Bom)
Home Solutions
Retail India Pvt. Ltd.
v. UOI
2011 (24) S.T.R. 129 (Del.)
ISSUE HELD
property and not services ‘in relation to’ value addition and thus cannot be regarded as a
value added tax.
List II • Notification and circular ultra vires
addition, hence it will not be considered as land and building’
a value added tax For use in the course or furtherance
of business or •commerce
Tax on ‘land and building’ requires a definite
• Renting of immovable property is a tax on
relationship with the land. It is a tax on the general
land and building under Entry 49 List II
ownership of the land. Renting is not a tax on land.
• No value addition in theTheseserviceswords do not form a part of the
• The assumption by a legislative body that an element
rendered present definition ofunder
servicedeclared
is involved is not irrational and absurd
• As long as the Parliament does not entrench upon
services. Would renting of immovable
a field reserved for the state legislature, the law is
property still be considered as athe
valid and within value
legislative competence of the
added service???? Parliament
• Renting of immovable property is a tax on • Renting of immovable property is for subserving
land and building under Entry 49 List II the cause of facilitating commerce, business
• No value addition in the services or promoting the same.
rendered, property transaction • The potentiality to be let out on rent for a purpose
• Aspect theory is not applicable as Entry 49 denotes an element of service is involved which
of List II would be redundant amounts to value addition
• Deeming fiction cannot be employed for • Once there is value addition and element of
taxing an entry reserved for the state service is involved, service tax gets attracted
legislature and is outside the purview of Entry 49 List II
6
Agenda

1 3

Transactions-Levy of tax by Centre

Aspect Theory
and State
Renting of Immovable
A
property
Hiring, leasing and licensing of
B
goods
Software development/
C
licensing of software

D Works contract
2

E Catering contracts
List of Taxes- Centre
Broadcasting services by DTH
and State Levy F
Operators

7
Statutory Provisions

Article 366(29A)- Tax on sale and purchase includes:

(d) a tax on the transfer of the right to use any goods for any
purpose (whether or not for a specified period) for cash,
deferred payment or other valuable consideration

Section 66E (c) of the Finance Act- Declared Service

Temporary transfer or permitting the use or enjoyment of any

intellectual property right

Section 66E (d) of the Finance Act- Declared Service

Hiring, leasing licensing of goods without transfer of right to

use
8
 Litigations-Transfer of right to use IPR
Transfer of IPR- Declared Service’ under service tax). Levy of VAT on such
intangibles has also been subject matter of litigation
AGS Entertainment v. UOI Malabar Gold v. CTO,
2013[32] STR 129 (Mad.) 2013 [32] S.T.R. 3 (Ker.)
Issue (Division bench decision)
Whether the temporary transfer of Issue:
copyright or its use or enjoyment Whether receipts on
amounts to transfer of right to use the account of franchisee fee
goods attract service tax or VAT?
Held Held:
Service tax is not leviable on the transfer The Court relied upon
of right to use, only on the temporary judgment in the matter of
transfer or permitting the use or BSNL and held that twin
enjoyment thereof. As the producer does elements i.e. effective
not relinquish his right, transfer of right to control and possession
use to the distributor is temporary were not satisfied. Thus,
Transfer of the right to use and franchise agreement will
permission to use the goods operate in not attract the
different fields Merely due to provisions of the KVAT
overlapping, legislation cannot be Act.
vitiated
Tata Sons Ltd v. State
of Maharashtra [2015
80 VST 173 Bom.]
Issue:
Whether sales tax is
leviable on agreement
allowing use of ‘TATA’
name and trade marks
by TATA group
companies
Held:
Court distinguished
BSNL decision. Held
that statute doesn’t
envisage exclusive
transfer and held sales
tax payable on amount
received for brand/trade
9
mark usage
Right to Use v. Transfer of Right to Use

BSNL v. Union of India Rashtriya Ispat Nigam Ltd. v. Union of India

2006 (3) ALT 6 (SC) 1990 77 STC 182 (AP)
• Goods available for delivery • Transfer of right to use is determined on the basis of
the facts of every case
• Consensus about the identity of the goods
• Legal right to use the goods • Delivery of possession must be distinguished
from its custody. the transferee of goods may be in
• Legal right to the exclusion of the transferor possession while transferor has the custody of the
• Goods once transferred cannot be transferred to goods.
any other person

Transfer
of right to
20th Century Finance Corp. Ltd. v. State of Mah GS Lamba v. State of AP
use
2000 (6) SCC 12. 2012-TIOL-49-HC-AP-CT

• Right to use arises only on the transfer of such
a right.
• Under VAT/ Sales Tax. Delivery per se cannot
determine exigibility to tax, actual transfer of right
to use.is required.
• Effective control does not always mean physical
control over the goods. If the manner, method, time
or use is decided, amounts to effective control.
• During the period of the contract, exclusive right to
use the goods along with the licenses vests with
the lessee to constitute “transfer of right to use”

10
Agenda

1 3

Transactions-Levy of tax by Centre

Aspect Theory
and State
Renting of Immovable
A
property
Hiring, leasing and licensing of
B
goods
Software development/
C
licensing of software

D Works contract
2

E Catering contracts
List of Taxes- Centre
Broadcasting services by DTH
and State Levy F
Operators

11
Statutory Provisions

Development/ Upgradation of
software-

If the software is transferred along

with development/upgradation
Section 66E (d) of Finance Act- service- Leviable to works Contract
Declared Services

Development, design, programming,

customization, adaptation, up
gradation, enhancement,
implementation of information Development/
technology software; Licensing of
software- Licensing of software-

VAT/service tax depending on

whether there is a transfer of right
to use

12
Development of Software-Litigation

Case Issue Decision

Sasken Communication
Technologies Ltd. v. Joint
Commissioner of
Commercial Tax
(2012) 55 VST 89 (Karn)
Whether the • The rights and title of the software
development of sought to be developed by the
software is a works Assessee always remains with the
contract and customer even before the software
accordingly leviable came into existence
to VAT under • The consideration received is for the
Kanataka VAT Act development services and not for
transfer of property in goods
• As there is no transfer of title
from the developer to the
customer, there is no sale leviable
to VAT.

Present position
Depending on the terms of the agreement and the time of transfer of title, the transaction is leviable to
service tax or VAT

13
Agenda

1 3

Transactions-Levy of tax by Centre

Aspect Theory
and State
Renting of Immovable
A
property
Hiring, leasing and licensing of
B
goods
Software development/
C
licensing of software

D Works contract
2

E Catering contracts
List of Taxes- Centre
Broadcasting services by DTH
and State Levy F
Operators

14
Statutory Provisions

Section 66E (h)- Finance Act

Service portion in the execution of a works contract

Article 366(29A)- Tax on sale or purchase of goods includes:

(b) a tax on the transfer of property in goods (whether as goods or in

some other form) invoked in the execution of a works contract

15
 Controversies-Works Contract

Cases Decision
State of Madras v. • Law prior to insertion of clause (29A) in article 366 of the
Gannon Dunkerley Constitution, categories of transaction as ‘deemed sale’ laid down
• Works contract was essentially a contract of service and no sales
AIR 1958 SC 560 tax could be levied on goods transferred in the course of execution
of works contract
Gannon Dunkerley & Co v. • Law governing the determination of taxable turnover under works
State of Rajasthan contract was settled in this case
• Tax on works contract would remain a tax on sale of goods
[1993] 88 STC 204 • Value of taxable turnover would not include the consideration
which was not towards the goods
• Consideration towards the service portion would not be taxable
under VAT statutes
BSNL v. UOI • Except in cases of works contracts and catering contracts as
covered under Article 366(29A), composite transactions cannot be
[2006 (2) STR 161 (SC)] split into contract of sale and contract of service
• The test whether a transaction is a ‘composite transaction’ is that
did the parties intend that separate rights arise out of the
constituent contract of sale and contract of service
• Dominant nature test does not apply to works contract
16
 Controversies-Works Contract
Cases
Daelim Industrial Co Ltd v.
CCE
[2007] 7 STT 184 (New
Delhi-CESTAT)
CCE v. BSBK Pvt Ltd
[2010] 26 STT 263 (New
Delhi –CESTAT) (LB)
Decision
• Contract entered into was a works contract on turnkey basis and
not a consultancy contract.
• Works contract cannot be vivisected. No liability of service tax on
works contract
• Turnkey contract can be vivisected
• Service elements involved in the contract can be segregated and
be valued for levy of service tax under Finance Act
• Article 366(29A)(b) of the Constitution of India provides for ‘deemed
sale of goods’ which envisages and allows vivisection of indivisible
contracts
17
Recent cases-Implications on service tax

Decision-Contracts for construction of flats undertaken by the Builder is for and

on behalf of the flat purchaser is a works contract. Building is a species of
L&T v. State of works contract.
Karnataka Transfer of property in goods can be in the form of goods or any other form
2013-VIL-03- including immovable property
SC-LB
The dominant nature test has no application.
Taxing the sale of goods is possible even after incorporation of goods, provided
the tax is directed to the value of goods and not immovable property

Kone elevators Decision-The contract for sale and installation of a lift was a works contract and
India Pvt. ltd v. not a contract for sale of good
State of TN
and Ors All such transactions would be treated as works contracts, leviable to VAT and
service tax

Comm. Of
Excise and
ST v. L&T Decision-Prior to 2007, i.e. introduction of works contract service, there was no
Limited charge or machinery provision under the Finance Act for taxing indivisible
Civil Appeal works contracts. Indivisible works contract not leviable to service tax prior to
6770 of 2004 introduction of works contract service category
(SC) 18
Agenda

1 3

Transactions-Levy of tax by Centre

Aspect Theory
and State
Renting of Immovable
A
property
Hiring, leasing and licensing of
B
goods
Software development/
C
licensing of software

D Works contract
2

E Catering contracts
List of Taxes- Centre
Broadcasting services by DTH
and State Levy F
Operators

19
Statutory Provisions

Section 66E (i)- Finance Act

Service portion in an activity wherein goods, being food or

any other article of human consumption or any drink
(whether or not intoxicating) is supplied in any manner as a
part of the activity

Article 366(29A)- Tax on sale or purchase of goods includes:

(f) tax on the supply, by way of or as part of any service or in any other
manner whatsoever, of goods, being food or any other article for
human consumption or any drink (whether or not intoxicating), where
such supply or service, is for cash, deferred payment or other valuable
consideration, and such transfer, delivery or supply of any goods shall
be deemed to be a sale of those goods by the person making the
transfer, delivery or supply and a purchase of those goods by the person
to whom such transfer, delivery or supply is made;
20
 Controversies
State of Punjab v. Associated Hotels of India Ltd
(1972) 2 SCR 937
ISSUE- Whether the supply of meals in a hotel along with
other amenities qualifies as a sale and is leviable to sales
tax
HELD- The transaction is one and indivisible i.e. for the
services of lodging provided by the Hotel.
There is no intention between parties to sell and
purchase food stuff. The sale is only incidental to service
No sales tax is leviable on the food supplied in the hotel
IRCTC v. Govt of NCT & Delhi
2010-TIOL-517-HC-Del-ST
ISSUE-Whether service tax and VAT, both, would be
leviable in respect of the catering services provided on
board the train
HELD The transaction between IRCTC and India
Railways is not a composite transaction as no services
are involved.
It is pure contract for sale and services, of heating etc., are
only incidental to the sale.
Service tax is not leviable on this transaction.
Nothern India Caterers (India) Ltd v. Lt. Gov of Delhi
1978 AIR 1591
ISSUE- Whether the supply of meals in a hotel qualify as a
sale and whether the supply of meals in a restaurant to
casual visitors qualifies as a sale
HELD- Restaurants also provides services in addition to
food, in the nature of furniture, furnishing, linen, crockery etc.
Following the judgment of State of Punjab v. Assoc. Hotels
of India Ltd., the services of meals to visitors in a restaurant
and meals in a hotel do not qualify as sales
Kerala Classified Hotels & Resorts Assoc v. UOI
2013-TIOL -533-HC-Ker.-ST
ISSUE-Constitutional validity of section 65(105)(zzzzv) and
(zzzzw) was challenged.Whether the supply of food and
beverages taxable under Entry 54 List II covers services
HELD On the basis of Article 366(29A) of the Constitution,
service forms a part of sale of goods and State Legislature has
the power to impose tax on the service element forming a part
of the sale of goods.
Writ petition allowed- Service tax on services provided by a
restaurant-beyond the legislative competance of the
Parliament
21
.
 Controversies-Post Declared Services
Valley Hotels and Resorts Ltd. v. CCT, Dehradun
Commercial Tax Revision 02/2014 dated April 10, 2014
ISSUE-
Whether VAT would be chargeable on the entire value of
food and beverages supplied, in the case where 40% of the
amount has already suffered service tax
HELD-
VAT can only be imposed on the sale of food and
beverages.
Since, the value of services has been declared at 40%
of the total value, VAT cannot be levied on the same.
Hotel East park and Anr. v. Union of India and Ors
W/P. No. 95/2013 dated May 6, 2014
ISSUE- Whether service tax can be charged on any item of
sale and vice vera
Whether section 66E(i) is violative of Article 366(29A)(f) of
the Constitution
HELD
Tax on sale and purchase of food can only be imposed by
the states. Similarly, tax on services can only be levied by the
Parliament. Hence, no service tax can be charged on any
item of food.
Article 366(29A)(f) of the Constitution does not provide that
services are subsumed in sales. It separates sale of food and
drinks from services.
VAT should not be charged on the entire amount of the bill
as 40% or 60 % is already leviable to service tax.
State should frame rules or issue clarifications in order to avoid
double taxation.
22
Agenda

1 3

Transactions-Levy of tax by Centre

Aspect Theory
and State
Renting of Immovable
A
property
Hiring, leasing and licensing of
B
goods
Software development/
C
licensing of software

D Works contract
2

E Catering contracts
List of Taxes- Centre
Broadcasting services by DTH
and State Levy F
Operators

23
 Entertainment Tax v. Service Tax
Direct to Home (‘DTH’) Operators- Broadcasting services- leviable to service
tax and entertainment tax
Bharti Telemedia Limited v. State of
Jharkhand 2014(1)J.L.J.R.635
ISSUE
Whether entertainment tax is the levy on
'broadcasting service' on which service tax is
leviable or falls under Entry 62 of List II
HELD
There are two different aspects/spheres of
DTH- broadcasting service for which service
tax is levied and entertainment for which
entertainment tax is levied. The transaction of
providing broadcasting services and
entertainment cannot be treated as an
indivisible contract so as to show that the
predominant transaction is broadcasting and
not entertainment
Tata Sky Limited v. State of Punjab
[2011] 37 VST 1
Issue
Whether levy of entertainment tax is
covered is covered under Entry 62 of List
II
HELD
The expression ‘entertainment’ is used in
a wide sense to cover entertainment of
any kind. Levy of entertainment tax is on
the entertainment aspect which is
independent from the levy of service tax
on the service aspect.
24
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