Service Tax and Value Added Tax
This research paper is basically based on my confusion over the applicability of two statutes on the same subject matter. The points which I have considered in this article related to taxability of Intellectual Property Right services and applicability of the Delhi Value Added Tax Act, 2005 on the right to use of intellectual property rights.
VALUE ADDED TAX
1. Most of the Indian states had rescinded their old Local Sales Tax Acts and adopted new Value Added Tax Act which is more logical and scientific. The changes in most of the States have come with effect from 1st April, 2005. It is noteworthy that most of the Value Added Tax Acts are identical since they are all based on the common understanding reached culminating in the reports of the Empowered committee and also the comprehensive white paper on the subject. Hence in-depth reading of any one particular Act is sufficient for this paper. Union Territory of Delhi with effect from 1st April, 2005 has like many other States has adopted Delhi Value Added Tax Act, 2005 (herein after “DVAT”).
Applicability:
2. Sales tax is applicable on the sale of goods from one person to another. In simple words if ownership of goods has transferred from one person to another person for consideration, then it amount to sale of goods (CHECK THE DEFINITION OF SALE UNDER DVAT). On a careful perusal of the definition of “Sale”, it is clear that the Value Added Tax is applicable on the sale of goods which includes right to use and execution of works contract. The term “sale” has been defined under Section 2(zc) of the DVAT. The relevant portion of the same is extracted as under:
“(zc) “Sale” with its grammatical variations and cognate expression means any transfer of property in goods by one person to another for cash or for deferred payment or for other valuable consideration (not including a grant or subvention payment made by one government agency or department, whether of the central government or of any state government, to another) and includes-
(i)…
……
(vi) 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;”
Goods:
3. Section 4 of the DVAT specifies rate of tax for different categories of goods which are specified in the schedules appended with the Act. The goods specified under the Third Schedule are liable to tax at the rate of 4%. Entry No 3 is relevant for us and which is extracted as under:
“3. All intangible goods like copyrights, patent, rep license, goodwill etc.”
4. The term “goods” has been defined under Section 2(m) of the DVAT which is extracted as under for ease of reference:
(m) “goods” means every kind of moveable property (other than newspapers, actionable claims, stocks, shares and securities) and includes-
(i) livestock, all materials, commodities, grass or things attached to or forming part of the earth which are agreed to be severed before sale or under a contract of sale; and
(ii) property in goods (whether as goods or in some other form) involved in the execution of a work contract, lease or hire-purchase or those to be used in the fitting out, improvement or repair of movable property;
5. Upon perusal of the above, it is abundantly clear that all kinds of corporeal and incorporeal property can be termed as goods under the definition. It is inclusive definition and it includes property in goods whether as goods or in some other form. In other words, goods which can be or those which can not be perceived by eyes are covered under the description of goods. As per Hon’ble Apex Court’s judgment in the case of Tata Consultancy Limited Vs State of Andhra Pradesh goods may be tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being brought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. This has more specifically been spelt out by the Hon’ble Delhi High Court in the case of Philco Exports Vs Sales Tax Officer, (124) STC 503 (Del). In this case defining the term “property” with reference to section 2(g) of the DVAT, Hon’ble High Court opined that it includes all properties whether corporeal or incorporeal. It is enough to take in all types of proprietary rights. Hence it is clearly established that Intellectual Property Rights like Patents, Trademarks and Copyright etc., are goods with in the ambit of DVAT.
6. Therefore, it is clear from the above that if one proprietor or holder of trademarks or patents or any other Intellectual Property Rights transfers his IP Rights to another person for use in business for consideration, he (the proprietor) is liable to pay VAT at the rate of 4% to the Sales Tax Department.
SERVICE TAX:
7. With effect from 10th September, 2004, Government of India has imposed Service Tax on the “intellectual property rights services”. The “taxable service” in respect of the “intellectual property rights services” under the Finance Act, 1994 is defined as under:
Section 65 (105) (zzr) taxable service means any service provided or to be provided to any person, by holder of intellectual property right, in relation to intellectual property service,”
8. Therefore, taxable service means that (a) a service is provided to or to be provided to any person by another person who is a holder of intellectual property right and (b) the service should be in relation to intellectual property service. The term “Intellectual property right” is defined under Section 65 (55a) of the Finance Act, 1994 as “intellectual property right means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright.”
9. Therefore as per the aforesaid provision, for Service Tax purposes, intellectual property rights means trademarks, trade name, logos, patents, designs and other similar intangible property. However, it specifically excludes copyright from the definition of intellectual property rights for the purposes of levy of Service Tax.
10. Further Section 65(55b) defines the term “intellectual property service” as under:
“intellectual property service” means,-
(a) transferring temporarily; or
(b) permitting the use or enjoyment of,
any intellectual property right;
11. Therefore upon combined reading of the all aforesaid provisions pertaining to intellectual property rights, it is clear that Service Tax can be levied even on temporary transferring of intellectual property rights to any person for consideration or permitting the use or enjoyment of any intellectual property rights by any person for consideration.
12. In simple words if the intellectual property right holder sells or permanently transfers such right to any person for consideration, in such situation, Service Tax would not be applicable on the consideration received from such sale or transfer. It would applicable only on transferring of intellectual property rights for limited period and that is too on temporarily usage basis.
Conflict:
13. Now upon reading of both the taxing statutes together as a layman, a question would have come to my mind that a person is liable to pay two taxes on the same transaction. Right to use for the levy of DVAT as per my understanding is more or less permitting use or enjoyment of any intellectual property right, which is also a taxable event under Service Tax. Would it not amount to double taxation? Are two taxes not applicable on a single transaction?
13. On a similar question the Hon’ble Supreme Court in the case of Radhkisan Rathi Vs. Additional Collector reported at (1995) 4 SCC 309 clarified the position and held that different competent taxing authorities under different Acts can impose tax on the same subject matter and this will not amount to double taxation.
14. Further in the case of Avinder Singh Vs State of Punjab reported (1979) 1SCC 137, the Hon’ble Supreme Court held that there is nothing in Article 265 of the Constitutional of India called double taxation, if on the same subject matter, the legislature chooses to levy tax twice over there is no inherent invalidity in the fiscal adventure unless there are other prohibitions.
Vishnu Pratap Singh Langawat
VALUE ADDED TAX
1. Most of the Indian states had rescinded their old Local Sales Tax Acts and adopted new Value Added Tax Act which is more logical and scientific. The changes in most of the States have come with effect from 1st April, 2005. It is noteworthy that most of the Value Added Tax Acts are identical since they are all based on the common understanding reached culminating in the reports of the Empowered committee and also the comprehensive white paper on the subject. Hence in-depth reading of any one particular Act is sufficient for this paper. Union Territory of Delhi with effect from 1st April, 2005 has like many other States has adopted Delhi Value Added Tax Act, 2005 (herein after “DVAT”).
Applicability:
2. Sales tax is applicable on the sale of goods from one person to another. In simple words if ownership of goods has transferred from one person to another person for consideration, then it amount to sale of goods (CHECK THE DEFINITION OF SALE UNDER DVAT). On a careful perusal of the definition of “Sale”, it is clear that the Value Added Tax is applicable on the sale of goods which includes right to use and execution of works contract. The term “sale” has been defined under Section 2(zc) of the DVAT. The relevant portion of the same is extracted as under:
“(zc) “Sale” with its grammatical variations and cognate expression means any transfer of property in goods by one person to another for cash or for deferred payment or for other valuable consideration (not including a grant or subvention payment made by one government agency or department, whether of the central government or of any state government, to another) and includes-
(i)…
……
(vi) 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;”
Goods:
3. Section 4 of the DVAT specifies rate of tax for different categories of goods which are specified in the schedules appended with the Act. The goods specified under the Third Schedule are liable to tax at the rate of 4%. Entry No 3 is relevant for us and which is extracted as under:
“3. All intangible goods like copyrights, patent, rep license, goodwill etc.”
4. The term “goods” has been defined under Section 2(m) of the DVAT which is extracted as under for ease of reference:
(m) “goods” means every kind of moveable property (other than newspapers, actionable claims, stocks, shares and securities) and includes-
(i) livestock, all materials, commodities, grass or things attached to or forming part of the earth which are agreed to be severed before sale or under a contract of sale; and
(ii) property in goods (whether as goods or in some other form) involved in the execution of a work contract, lease or hire-purchase or those to be used in the fitting out, improvement or repair of movable property;
5. Upon perusal of the above, it is abundantly clear that all kinds of corporeal and incorporeal property can be termed as goods under the definition. It is inclusive definition and it includes property in goods whether as goods or in some other form. In other words, goods which can be or those which can not be perceived by eyes are covered under the description of goods. As per Hon’ble Apex Court’s judgment in the case of Tata Consultancy Limited Vs State of Andhra Pradesh goods may be tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being brought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. This has more specifically been spelt out by the Hon’ble Delhi High Court in the case of Philco Exports Vs Sales Tax Officer, (124) STC 503 (Del). In this case defining the term “property” with reference to section 2(g) of the DVAT, Hon’ble High Court opined that it includes all properties whether corporeal or incorporeal. It is enough to take in all types of proprietary rights. Hence it is clearly established that Intellectual Property Rights like Patents, Trademarks and Copyright etc., are goods with in the ambit of DVAT.
6. Therefore, it is clear from the above that if one proprietor or holder of trademarks or patents or any other Intellectual Property Rights transfers his IP Rights to another person for use in business for consideration, he (the proprietor) is liable to pay VAT at the rate of 4% to the Sales Tax Department.
SERVICE TAX:
7. With effect from 10th September, 2004, Government of India has imposed Service Tax on the “intellectual property rights services”. The “taxable service” in respect of the “intellectual property rights services” under the Finance Act, 1994 is defined as under:
Section 65 (105) (zzr) taxable service means any service provided or to be provided to any person, by holder of intellectual property right, in relation to intellectual property service,”
8. Therefore, taxable service means that (a) a service is provided to or to be provided to any person by another person who is a holder of intellectual property right and (b) the service should be in relation to intellectual property service. The term “Intellectual property right” is defined under Section 65 (55a) of the Finance Act, 1994 as “intellectual property right means any right to intangible property, namely, trade marks, designs, patents or any other similar intangible property, under any law for the time being in force, but does not include copyright.”
9. Therefore as per the aforesaid provision, for Service Tax purposes, intellectual property rights means trademarks, trade name, logos, patents, designs and other similar intangible property. However, it specifically excludes copyright from the definition of intellectual property rights for the purposes of levy of Service Tax.
10. Further Section 65(55b) defines the term “intellectual property service” as under:
“intellectual property service” means,-
(a) transferring temporarily; or
(b) permitting the use or enjoyment of,
any intellectual property right;
11. Therefore upon combined reading of the all aforesaid provisions pertaining to intellectual property rights, it is clear that Service Tax can be levied even on temporary transferring of intellectual property rights to any person for consideration or permitting the use or enjoyment of any intellectual property rights by any person for consideration.
12. In simple words if the intellectual property right holder sells or permanently transfers such right to any person for consideration, in such situation, Service Tax would not be applicable on the consideration received from such sale or transfer. It would applicable only on transferring of intellectual property rights for limited period and that is too on temporarily usage basis.
Conflict:
13. Now upon reading of both the taxing statutes together as a layman, a question would have come to my mind that a person is liable to pay two taxes on the same transaction. Right to use for the levy of DVAT as per my understanding is more or less permitting use or enjoyment of any intellectual property right, which is also a taxable event under Service Tax. Would it not amount to double taxation? Are two taxes not applicable on a single transaction?
13. On a similar question the Hon’ble Supreme Court in the case of Radhkisan Rathi Vs. Additional Collector reported at (1995) 4 SCC 309 clarified the position and held that different competent taxing authorities under different Acts can impose tax on the same subject matter and this will not amount to double taxation.
14. Further in the case of Avinder Singh Vs State of Punjab reported (1979) 1SCC 137, the Hon’ble Supreme Court held that there is nothing in Article 265 of the Constitutional of India called double taxation, if on the same subject matter, the legislature chooses to levy tax twice over there is no inherent invalidity in the fiscal adventure unless there are other prohibitions.
Vishnu Pratap Singh Langawat
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