Presentation on theme: "K.VAITHEESWARAN ADVOCATE & TAX CONSULTANT"— Presentation transcript:
1K.VAITHEESWARAN ADVOCATE & TAX CONSULTANT SERVICE TAX / VAT – ISSUESK.VAITHEESWARAN ADVOCATE & TAX CONSULTANTMobile:s :Flat No.3, First Floor, No.9, Thanikachalam Road, T. Nagar,Chennai , IndiaTel.: / 4048402, Front Wing,House of Lords,15/16, St. Marks Road,Bangalore – , IndiaTel : /
2SECTION 66BThere shall be levied a tax ( hereinafter referred to as the service tax ) at the rate of 12% on the value of all services other than those specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.
3SECTION 66B Tax on value of all services Other than those specified in the negative list.Provided or to be provided in the taxable territory.By one person to another.
4TAXATION OF ALL SERVICES All services to be taxed other than services specified in the negative list – Sec. 66BNegative list specified through statutory provisions – Sec. 66DSome more services exempt through Notification No.25/2012.Section 65, 66 and 66A have no application after the effective date.
5‘SERVICE’ DEFINED IN TERMS OF SECTION 65B(44) Service means an activity carried out by a person for another for consideration and includes a declared service.Activity?Education Guide states that “Activity would include an act done, a work done, a deed done, an operation carried out, execution of an act, provision of a facility, etc. Activity could be active or passive and would also include forbearance to act.”Can advances be subject to service tax?
6WHAT IS CONSIDERATION? Consideration not defined. Education Guide borrows from Indian Contract Act, 1872 and states that “ Monetary, non-monetary, deferred payment and even recharges between establishments is consideration??? ”Activity without consideration will not be taxable (Gifts, Donations / Grants)Is non-monetary consideration is relevant?In the context of sales tax, the definition refers to valuable consideration along with cash or deferred payment.Whether Section 67 has relevance when a very limited reference to consideration exists in Section 65B(44).
7WHAT IS CONSIDERATION?In the case of Commission of the European Communities Vs Republic of Finland, public offices in Finland were providing legal services free of charge or for part payment based on income/ wealth group of recipients of services. The Department sought levy of tax on the service provided for part payment. The ECJ held that payment made by recipient of services was only a part payment and did not cover whole amount of fees set by law by reference to nature if dispute. Although part payment represented a portion of fee, but, it was fixed based on recipient’s income and assets and not on basis of number of hours worked by public offices and complexity of case concerned. Hence, link between legal aid services provided by public offices and payment to be made by recipients was not sufficiently direct for that payment to be regarded as consideration for those services and therefore not taxable.
8COST SHARING / REIMBURSEMENT So long as there is no margin on the expenses, it is possible to take a position that there is no service being rendered and that reimbursement is not liable to service tax.The Delhi High Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. Vs. Union of India (2013) 29 STR 9, has struck down Rule 5(1) of the Valuation Rules, 2006 which provides for inclusion of expenditure or costs incurred by the service provider in the course of providing taxable service in the value on the ground that it is ultra vires Section 66 and Section 67 and travels much beyond the scope of the said Sections. What is brought to charge under the relevant Sections is only the consideration for the taxable service.The Delhi High Court in the context of Income Tax Law in the case of CIT Vs. Industrial Engineering Projects Pvt. Ltd. (1993) 202 ITR 1014 and the Bombay High Court in the case of CIT Vs. Siemens Aktiongesellschaft (2008) TIOL 569–Mum. have held that reimbursement of expenses does not constitute income and it is not taxable.
9COMPENSATION?In the case of Jurgen Mohr Vs. Finanzamt Bad Segeberg, a farmer undertaking to discontinue milk production under a Government Policy to reduce milk obtained compensation from Government for such discontinuance. The ECJ held that Government is acting in public interest and no service is acquired by the Government for its own use or consumption. The tax is a consumption based tax and cannot be levied without consumption of service.Compensation is not a consideration for any service as there is no consumption involved in this case. Similar decision in the case of Landboden Agrardienste GmbH & Co. LG Vs. Financzat Calau where the Government awarded compensation for reduction of potato production to a farmer.In the case of hotels, the deposit that is collected in advance and retained on cancellation of booking does not constitute a remuneration for supply of service but is in the nature of compensation – ECJ in Societe Thermale de Eugenie – less – Batus Vs. Ministere de Economie des Finances et de Industrie
10SERVICE – EXCLUSIONExcludes an activity which constitutes merely transfer of title in goods by way of sale, gift or in any other manner.Goods defined to mean every kind of movable property other than actionable claim and money and includes securities, growing crops, grass, and things attached to or forming part of land which is agreed to be severed before or under a contract of sale.Transfer of title in goodsMutual funds would fall within the ambit of securities.Transfer of title in units/ or trading in goods for the purposes of Rule 6 of Cenvat Credit Rules?
11SERVICE – EXCLUSIONS (Cont…) Excludes transfer of title in immovable property by way of sale, gift or in any other manner.Immovable property not defined.Immovable property in terms of General Clauses Act includes land, benefits to arise out of land, things attached to the earth or permanently fastened to anything attached to the earth.Joint Development – Landowner / Developer perspectiveCan the transaction be seen as barter of land for constructed apartments?Can the transaction be seen as a transfer of title in immovable property from both sides?
12SERVICE – EXCLUSIONS – ARTICLE 366(29A) Transfer otherwise than in pursuance of the contract of property in any goods for cash, deferred payment or other valuable consideration .A transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.A delivery of goods on hire purchase or any system of payment by installments.A 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.A supply of goods by any unincorporated association or body of persons to a member thereof for cash deferred payment or other valuable consideration.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.
13DELHI CHIT FUND ASSOCIATION CASE The Delhi High Court in the case of Delhi Chit Fund Association Vs. Union of India (2013) 30 STR 347 has held that the definition of service under Section 65B(44) implies four elements namely(i) person providing service;(ii) person receiving service;(iii) actual rendering of service;(iv) consideration for service.Unless all the four are present activity cannot be charged with service tax. Mere transaction in money or actionable claim can neither be considered as a service not does it have the four elements.No tax on chit funds.
14SERVICE – EXCLUSIONSExcludes provision of service by an employee to an employer in the course of or in relation to his employment.Education Guide states that if employee provides his services on contract basis to an associate company of the employer then this would be treated as provision of service.Premature termination compensation not taxable.Employment – Issues.
15SERVICE – EXCLUSIONSDirector appointed by the Board or Director as per memorandum of articles with independent charge.Sitting fees of director?Salary received by a partner from the firm?Supreme Court in the case CIT Vs. R.M. Chidambaram Pillai (1997) 106 ITR 292 has held that Partner’s Salary is one mode of determining share of profits.Former executives providing consultancy on retainer basis?
16EMPLOYMENTThe Supreme Court in the case of Payare Lal Adishwar Lal Vs. CIT (1960) 40 ITR 17 has held that the following four criteria would be relevant for determining whether the agreement is in the nature of employment:(i) choice of selection of the employee;(ii) power of control and method of doing work;(iii) manner in which remuneration is fixed; and(iv) right of suspension or dismissing.
17NEGATIVE LIST – A FEW ITEMS Negative List means the services which are listed in Section 66D.Services by GovernmentServices relating to agriculture or agricultural produceTrading of goodsAny process amounting to manufacture or production of goodsBetting, gambling, lotteryAdmission to entertainment
18EXEMPTIONS – A FEW ITEMS Health Care ServicesServices by an entity registered under Section 12AA by way of charitable activitiesRenting of precints of a religious place meant for general publicServices by way of conduct of any religious ceremonyServices provided by way of training or coaching in recreational activities relating to arts, culture or sports.Services provided by an educational institution to its students, faculty and staff.
19EXEMPTIONS Services provided to an educational institution by way of (i) Transportation of students, faculty and staff(ii) catering including any mid day meals scheme sponsored by the Government(iii) security or cleaning or housekeeping services performed in such educational institution(iv) services relating to admission to or conduct of examination by such institution
20EXEMPTIONSServices provided by way of temporary transfer or permitting the use or enjoyment of copyright, -(a) Covered under Section 13(1)(a) of the Copyright Act relating to original literary, dramatic, musical or artistic work; or(b) of cinematograph films for exhibition in a cinema hall or cinema theatre.Services by a performing artist in folk or classical art forms of (i) music (ii) dance (iii) theatre excluding services provided by such artist as a brand ambassador.
21EXEMPTIONSServices by a hotel, inn, guest house, club or camp site by whatever name called for residential or lodging purposes having a declared tariff of a unit of accommodation below Rs.1000/- per day or equivalent.Restaurants without A/C / central heating.Sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt.Services by way of transfer of a going concern as a whole or an independent thereof.
22CONSTRUCTION OF COMPLEX Service includes a declared service but does not include an activity of transfer of title in immovable property by way of sale, gift or in any other manner.Section 66E(b) while setting out declared services covers construction of a complex, building, civil structure or part thereof including a complex or building intended for sale to a buyer wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority.Sale of an immovable property is excludedConstruction of a complex where monies are received before issue of completion certificate is a declared service.K.Vaitheeswaran - All Copyrights Reserved
23CONSTRUCTION OF COMPLEX No more complex definition of construction of complexWhether Macro Marvel decision is still relevant?Notification No. 25/2012 dated w.e.f exempts services by way of construction, erection, commissioning or installation of original works pertaining to a single residential unit other than as a part of a residential complex (Entry 14 (b)).Residential complex is defined to mean “any complex comprising of a building or buildings having more than one single residential unit.”Single residential unit means a self contained residential unit which is designed for use wholly or principally for residential purposes for one family.K.Vaitheeswaran - All Copyrights Reserved
24CONSTRUCTION OF COMPLEX ActivityTaxabilityConstruction of a complex comprising of more than one residential unitTaxableConstruction of a single bungalow of a size of 5000 sq. ft. meant for a familyNot taxableConstruction of a two unit building with separate floor plans and paid for separately by two brothersTaxable?Construction of 50 villas in a gated communityAlteration and re-modeling of an existing single residential unitTaxable if not in the nature of original worksK.Vaitheeswaran - All Copyrights Reserved
25NEW LAW - ABATEMENT DESCRIPTION OF TAXABLE SERVICE PERCENTAGE CONDITIONSConstruction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority.For a residential unit satisfying both conditions namely carpet area being less than 2000 sft. and amount charged being less than Rs.1 crore.(b) Other than (a)2530CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004.(ii) The value of land is included in the amount charged from the service receiver.K.Vaitheeswaran - All Copyrights Reserved
26LANDOWNER SHARE Joint Venture Different models Monetary share / share of constructed areaIs the contractor liable to pay service tax on construction done for the land owner?K.Vaitheeswaran - All Copyrights Reserved
27FAQIR CHAND GULATIAn agreement between the owner of a land and a builder for construction of apartments and sale of those apartments so as to share the profits may be a joint venture, if the agreement discloses an intent that both parties shall exercise joint control over the construction/development and be accountable to each other for their respective acts with reference to the project.On facts there is a contract for construction of an apartment and there is consideration for such construction flowing from the land owner to the builder (in the form of sale of undivided share in the land and permission to construct and own the upper floors).The land owner is the consumer, builder is the service provider.
28LANDOWNER SHARE Tax on same rate as charged on other buyers Tax on average rateTax on construction costTax payable by adopting value of UDS transferredDecision of the Supreme Court – (Faqir Chand Gulati Vs. Uppal Agencies Pvt. Ltd.) Consumer case.K.Vaitheeswaran - All Copyrights Reserved
29LANDOWNER SHAREChennai Tribunal in the case LCS City Makers Vs. CST (2012) TIOL 618 has held that:(a ) there is no infirmity in adopting value of the flats sold for value of flats allotted to land owners.(b) guideline value of land cannot be adopted.(c) Contention that consideration received other than in the form of money prior to not acceptable as substantial part of service was provided after valuation rules were notified.K.Vaitheeswaran - All Copyrights Reserved
30LANDOWNER SHAREThe Chennai Tribunal in the case of Aswini Apartments (unreported) vide order dated on a similar issue remanded the matter back to the adjudicating authority to give a ruling on the legal issues raised. One of the legal issues raised was that in respect of land owner share the consideration would be the notional value received for the value of undivided share of land obtained from the land owner. This decision was rendered after the decision of LCS.The Commissioner (Appeals), Chennai in the case of Navin Housing and Promoters Pvt. Ltd. in O-i-A No.209/2010 dated has held that where the land owner is given any constructed area as part of the joint venture, service tax is not applicable on landowner share.Board Circular dated 151/2/2012 dated the value of similar flats as are sold nearer to the date on which land is being made available
31TAX IMPLICATIONS FOR LANDOWNER Developer is likely to recover the service tax in respect of the apartments allocated to the landowner.If landowner markets these apartments prior to issue of completion certificate and receives money in advance, service tax exposure.If landowner executes a single sale deed for the apartment and the land?K.Vaitheeswaran - All Copyrights Reserved
32POSITION IN INCOME TAXWhere the document that is executed is in the nature of an agreement for transfer and possession is handed over as part performance as contemplated in Section 53A of the Transfer of Property Act, 1882 then there is a transfer and capital gains would arise immediately. This would be evident in a situation where the developer settles the consideration in the form of money or monies worth on an outright basis and the land owner has no relevance or say in the development work.K.Vaitheeswaran - All Copyrights Reserved
33INCOME TAX(contd)Bombay High Court in Chaturbhuj Dwarkadas Kapadia Vs. CIT (2003) 260 ITR 491, has in the context of development agreements held that the year of taxability is the year in which the contract is executed. The Court held that in the case of development agreement one cannot go by substantial performance of the contract and the year of chargeability would the year of execution.The decision of the Bombay High Court in the case of Chaturbhuj Dwarkadas Kapadia was distinguished by the Bombay Tribunal in the case of ACIT Vs. Mrs. Geetha Devi Pasari (104 TTJ 375)The Pune Bench of the Tribunal in the case of Mahesh Nemichandra Vs. ITO (2012) TIOL 408 has held that where the assessee forms a JV with a builder for development of property and enters into an irrevocable agreement the date of the Agreement would be the date of transfer .The Mumbai Tribunal in the case of Hillside Construction Co. Vs. DCIT (2012) TIOL 516 has held that where developments rights were parted the entire amount became due on signing of the development agreement and handing over of possession of the land. Postponement of payment does not stop accrual of income.K.Vaitheeswaran - All Copyrights Reserved
34INCOME TAX(contd)Chennai Tribunal in Mount Mettur Pharmaceutical (2008 TIOL 657) has held that when vacant possession of undivided share of land Is handed over on , the transfer took place onAAR in Jasbir Singh Sarkaria (294 ITR 196) has ruled that for Section 2(47)(v) to apply there must be a transaction under which the possession of immovable property is allowed to be taken or allowed to be retained. What is contemplated is a transaction which has a direct and immediate bearing on allowing possession to be taken in part performance of the contract of transfer. It is at that point of time the deemed transfer takes place.
35INCOME TAX (Cont.)Hyderabad Bench of the Tribunal in the case of Akkineni Nagarjuna Rao (2012) 52 SOT 23 has held that where a plot of land was given for development to the developer under an agreement with a promise by the developer to handover 35% of the built up area, it is a case of transfer since possession of the land had been handed over.Chennai Bench of the Tribunal in the case of Vijaya Productions (2012) 134 ITD 19 has held that when possession is not taken and the power is only to enable contractual obligations in planning and development there is no transfer.
36POSSIBLE CONCLUSIONS(i) If possession is handed over to the developer on the date of signing the development agreement then in the light of the various decisions referred to above and in the absence of an alternative view emerging in a higher forum, transfer would take place on the date of execution of the development agreement.(ii) If possession of property as well as the right to deal with the property in any manner is granted through a power of attorney at a later point of time and the agreement refers to this aspect as a specific future transaction to be consummated on the happening of an event, then the year of taxability would be the year in which the said transaction takes place.(iii) Where transfer takes place by virtue of any of the trigger points, the land owner can take recourse to Section 50D and adopt the fair market value as the consideration for the purpose of calculating capital gains.
37POSSESSION Date of possession Conflict between developer and landowner Postponement of date of possession from a capital gain perspective may result in higher service tax liability.
38TAXATION OF WORKS CONTRACT UNDER THE NEW LAW Section 65B(54) of the Finance Act, 1994 defines ‘works contract’ as under:-“ Works contract means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.”K.Vaitheeswaran - All Copyrights Reserved
39WORKS CONTRACTSIn the earlier regime only select works contracts were covered under the service tax levy.In the new regime all works contracts are taxable.Repair and maintenance is also considered as a works contract.K.Vaitheeswaran - All Copyrights Reserved
40VALUATIONValue of service portion = Gross amount charged for the works contract Less the value of property in goods transferred in the execution of the said works contract.Gross amount shall not include VAT.Value shall include labour, amount paid to sub-contractor for labour and services, charges for planning, design, architect, hire, cost of consumables, cost of establishment, similar expenses and profit relatable to supply of labour and service.Where VAT has been paid on the actual value of the property in goods transferred in the course of execution of WCT then such value adopted for VAT shall be taken as value of property in goods for determination of value of services.K.Vaitheeswaran - All Copyrights Reserved
41VALUATION – Other Scenarios CATEGORYVALUEWCT for execution of original works40% of the total amount chargedWCT for maintenance or repair or reconditioning or restoration or servicing of any goods or maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tile, installation of electrical fittings of an immovable property.70% of the total amount chargedCenvat credit is not available on inputs.K.Vaitheeswaran - All Copyrights Reserved
42VALUATION - IssuesWhen Section 65B(44) excludes specifically transfers referred to in Article 366(29A), can Rule 2A create a higher liability including the goods portion.For certain contracts under the VAT Law, 85% is accepted as goods portion and 15% is accepted as labour portion. For the same contract, under the Service Tax Law, labour portion is 40%.For maintenance contracts, 70% is adopted as service value under service tax law and VAT law adopts 70% as material value.K.Vaitheeswaran - All Copyrights Reserved
43LARGER BENCH DECISION IN THE CASE OF L&T Three conditions must be satisfied for the levy namely(a) There must be a works contract(b) The goods should have been involved in the execution of the works contract(c) The property in those goods must be transferred to a third party either as goods or in some other form.If the developer has received or entitled to consideration all the three conditions are fully met.
44LARGER BENCH DECISION IN THE CASE OF L&T In the performance of the contract for construction, the goods are intended to be incorporated in the structure even though they lost their identity as goods.Where a contract comprises of both works contract and transfer of immovable property such contract does not alter the status of being a works contract.A contract may involve both a contract of work and labour and a contract for sale.
45LARGER BENCH DECISION IN THE CASE OF L&T Even if the dominant intention is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contracts.
46LARGER BENCH DECISION IN THE CASE OF L&T Taxing the sale of goods element in WCT is permissible even after incorporation of goods provided the tax is directed on the value of goods and does not purport to tax the transfer of immovable property. The value of goods which can constitute the measure for levy of tax has to be the value of goods at the time of incorporation of the goods in the works even though the property passes as between the developer and the flat purchaser after incorporation of goods.
47SERVICE TAX IMPLICATIONS If agreement between developer and purchaser is a WCT for VAT purposes based on decision of L&T then it is also WCT for service tax purposes.Service tax at the rate of 12.36% on 40% of the construction agreement?Is there any difference between construction of complex as a category and works contract service since both categories are considered as declared services in terms of Section 66E?
48SERVICE TAX IMPLICATIONS Assuming land value is Rs.50 lakhs and construction consideration is Rs.1 crore, under construction of complex service, service tax is payable at rate of 12.36% on 30% of Rs.1.5 crores that is Rs.5,56,200/-.Under works contract service, service tax is payable at the rate of 12.36% on 40% of Rs.1 crore that is Rs.4,94,400/-.Cenvat credit effect is neutral in both systems since credit is available on capital goods and input services and not available on inputs.
49THE KONE ELEVATOR STORY Composite contract for manufacture, supply and installation of lifts in a building – whether it is a contract for sale of goods or a works contract.
50THE KONE ELEVATOR STORY A Five Member Bench of the Supreme Court in the case of Kone Elevator India Pvt. Ltd. Vs. State of Tamil Nadu (2014) 34 STR 641 has held as under:-Works contract is an indivisible contract but by legal fiction it is divided into two parts, one for sale of goods and the other for supply of labour and services.The concept of dominant nature test for treating a contract as a works contract is not applicable.Works contract under Article 366(29A) takes within its sweep all genre of works contract.Once the characteristics of works contract are met in a contract, any additional obligation in the contract would not change the nature of the contract.
51THE KONE ELEVATOR STORY A lift is not a plant which is erected at site. Without installation the lift cannot be mechanically functional. Installation of lift in a building is a composite contract.In L&T the Bench has held that the ultimate transaction between the parties may be the sale of a flat but it cannot be said that the characteristics of WCT are not involved in that transaction.If the contract is a composite contract falling within the definition of WCT under Article 366(29A), the incidental part as regards labour and service pales into total insignificance for the purpose of determining the nature of the contract.
52THE KONE ELEVATOR STORY It is necessary to state that if there are two contracts namely purchase of the components of the lift from the dealer, it would be a contract for sale and similarly if separate contract is entered into for installation that would be a contract for labour and service. But a pregnant one, once there is a composite contract for supply and installation it has to be treated as a works contract for it is not a sale of goods / chattel simpliciter.
53WCT – SOME THOUGHTSRationale of Kerala High Court decision in the case of Kerala Classified HotelsThe Uttarakhand High Court in the case of Valley Hotel & Resorts Vs. Commissioner (2014-TIOL-600) has held that since a restaurant pays service tax on 40% of the value VAT cannot be imposed on such value. The Court held that VAT can be imposed only on sale of goods and not service. Since the authority competent to impose service tax has also assumed competent to declare what is a service and the State has not challenged the same, no VAT can be imposed on that amount.
54RENTING OF IMMOVABLE PROPERTY Declared serviceThe Supreme Court in the case of Member Board of Agricultural Income Tax Vs. Sindhurani Chaudhurani (1957) 32 ITR 169 has held that salami in the form of a lump sum non-recurring payment made by a prospective payment to the landlord as a consideration for the settlement of agricultural land, paid anterior to the constitution of relationship of landlord and tenant is not ‘rent’.The Mumbai Bench of the Income Tax Appellate Tribunal in the case of ITO Vs. Shah Group Builders Ltd. (2013-TIOL-751) has held that lease premium paid to CIDCO is not in the nature of rent contemplated under Section 194-I and the assessee was not liable to deduct tax at source.The Chennai Bench of the Tribunal, however has taken a contrary position in the case of Foxconn and has held that Section 194-I is applicable. However, the Chennai Bench has not considered the angle that the development charges is not ‘rent’ but the consideration for the transfer of right to use the land. The provisions of Section 194-I would be attracted provided what is paid is in the nature of rent and rent is defined to mean any payment for the use of any land or building, etc.
55RENTING OF IMMOVABLE PROPERTY In the context of service tax when tax was imposed on renting of immovable property through Section 65(105)(zzzz) of the Finance Act, 1994, the Tribunal in the case of Greater Noida Industrial Developmental Authority Vs. CCE (2014) TIOL 1741 has held that service tax under Section 65(105)(zzzz) read with Section 65(90a) cannot be charged on the premium or salami paid by the lessee to the lessor for transfer of interest in the property from the lessor to the lessee as this amount is not for continued enjoyment of the property leased.
56TEMPORARY TRANSFER / PERMITTING THE USE / ENJOYMENT OF IPR Declared serviceIPR not defined.None of the old definitions are applicable.Old law defined IPR to mean any right to intangible property namely trademark, designs, patents, or any other similar intangible property under any law for time being in force but does not include copyright. Subsequently, copyrights in the context of movies were brought within the ambit of service tax.What constitutes IPR under the new law?
57IPRPatents, designs, trademark and copyrights are clearly known as IPRs.Technical know-how?Business or commercial rights?Data?Supreme Court in the case of CIT Vs. SMIFS Securities Ltd. (2012) 348 ITR 302 in the context of income tax has held that goodwill would fall under Explanation 3(b) to Section 32 of the Income Tax Act. In other words, goodwill has been considered as a depreciable asset in the segment of any other business or commercial rights of a similar nature.
58IPR Bundle of rights Ownership Absolute transfer Licensing model Lump sum payment and recurring royaltyReverse charge mechanism – IPR servicesR & D cess
59IPR - SERVICE TAX Vs. VATTemporary transfer or permitting the use or enjoyment of any IPR is a declared service.Transfer of right to use goods falls under Article 366(29A) and transactions falling under Article 366(29A) are excluded from the ambit of ‘service’ by Section 65B(44) which defines service.Transfer of right to use goods is a sale pursuant to Article 366(29A) and States levy VAT on such transactions.
60IPR AND SALES TAX / VATGoa imposes VAT on all intangible goods like copyright, patent, REP license, EXIM Scrips, SIL Licenses through Entry-4, Schedule-B.Karnataka imposes VAT on Exim Scrips, REP license, special import license, value based advance license, export quotas, DEPB licenses, Copyrights, Patents and the like (including software licenses by whatever name called), through Item 34, Schedule III.Kerala VAT imposes VAT on intangible goods like copyright, patent, REP license, DEPP, others through Entry 68, Schedule III.Jammu & Kashmir imposes VAT on all intangible goods like Copyright, Patent, REP license through Item 5, Schedule C.Delhi imposes VAT on all intangible goods like Copyright, Patent, REP, Goodwill, etc. through Item 3,Schedule III.AP imposes on all intangible goods as may be notified including patents, trade marks, designs, copyright, technical know-how, franchise and goodwill through Item 2, Schedule IV.Tamil Nadu imposes VAT on intangible goods like copyrights, patents, REP License through Item 70, Part B, Schedule I.
61IPR – SERVICE TAX Vs. VATMadras High Court in the case of A.V. Meiyappan has held that copyright is in the nature of incorporeal movable property and hence goods.Madras High Court in the case of SPS Jayam Vs. TNTST has held that royalty for allowing use of trademark attracts sales tax.Bombay High Court in the case of CST Vs. Duke & Sons has held that permission to use trademark is a sale and liable to sales tax.
62MALABAR GOLD DECISIONKerala High Court in the case of Malabar Gold Pvt. Ltd. Vs. CTO has held that:(i) Entry No. 68 of KVAT is confined to copyright, patent and REP License. Trademark cannot be roped under ‘others’.(ii) Under the agreement there is only a license to use the trademark and the transfer of its use is not to the exclusion of the transferor.(iii) The Company retains the rights to transfer the same to others.(iv) Even when the franchisee agreement is in force, the Company can use the trademark on their own and also enter into other franchisee agreements. Effective control remains with the Company.
63NUTRINE DECISIONAP High Court in the case of Nutrine Confectionery Vs. State of AP, has held that:(i) allowing other companies to use trademark and logo is transfer of right to use goods.(ii) a trademark or logo which is incorporeal or intangible could always be assigned by the proprietor while retaining the right to use for itself.
64KWALITY BISCUITS DECISION Karnataka High Court in the case of Kwality Biscuits Pvt. Ltd. Vs. State of Karnataka has held that intellectual property rights are acquired over a period of time by hard work. They are not goods in which the dealer traded in the course of his business. It is not possible to hold that the dealer was in the business of buying and selling intellectual property rights or that the sale of intellectual property was incidental or connected with manufacture and sale of biscuits, confectionery, wheat products, jams, jellies and creams. Therefore the dealer was not liable to pay sales tax on the sale of intellectual property.
65HOTELS AND RESTAURANTS VATService Tax at the rate of 12.36% on 40% of the value.Bombay High Court has upheld the levy of service tax.Division Bench of the Kerala High Court has struck down the levy.Uttarakhand High Court in the case of Valley Hotel & Resorts Vs. Commissioner (2014-TIOL-600) has held that since a restaurant pays service tax on 40% of the value VAT cannot be imposed on such value. The Court held that VAT can be imposed only on sale of goods and not service. Since the authority competent to impose service tax has also assumed competent to declare what is a service and the State has not challenge the same, no VAT can be imposed on that amount.
66FUTURE GST 122nd Constitutional Amendment Bill E-Commerce Revenue constraints and new taxes
67K.VAITHEESWARAN ADVOCATE & TAX CONSULTANT THANK YOUK.VAITHEESWARAN ADVOCATE & TAX CONSULTANTMobile:s :Flat No.3, First Floor, No.9, Thanikachalam Road, T. Nagar,Chennai , IndiaTel.: / 4048402, Front Wing,House of Lords,15/16, St. Marks Road,Bangalore – , IndiaTel : /