The problem of double taxation of a particular transaction under the indirect tax laws is well known. The predicament is with regard to transactions which have elements of both a supply of goods as well as a provision of service. These potentially have the typical tax implications of both the State VAT and the service tax. Several earlier articles in this column have addressed this challenge. However, it continues to be an enduring one, as the discussion below highlights.
The Delhi High Court, in a recent decision in Indian Railways Catering & Tourism Corporation Ltd Vs Government of NCT of Delhi & others (2010-TIOL-517-HC-DEL-ST) has held, on facts, that a particular transaction was chargeable to the State VAT, as a sale of goods, notwithstanding the factual position that the assessee had already discharged the service tax on the said transaction, as a provision of service.
In the subject case, the issue at hand was the applicability of VAT on the supply of food and beverages by the petitioners, IRCTC, to the Indian Railways. The petitioners had also sub-contracted their obligations in respect of such supplies in relation to some trains to various sub-contractors. The consideration for the supply of food and beverages was paid by the Indian Railways, based on a certain agreed computation, for what the petitioners termed as outdoor catering services. The petitioners, in turn, paid the sub-contractors for their supplies. The contracts between the petitioners and the Indian Railways and the ones between the sub contractors and the petitioners were separate.
The point before the Delhi High Court was whether the transactions between the petitioners and the Indian Railways for providing food and beverages on the trains were in the nature of sale and whether VAT was payable on these transactions, even though the service tax had already been paid. The petitioners argued that the transactions with the Indian Railways had already been charged to the service tax and, accordingly, could not be subjected to the levy of VAT. The High Court did not accept the contention of the petitioners. The High Court said, as far as the provision of food, snacks and water on board the trains was concerned, the transaction was altogether different from an outdoor catering service. The High Court observed that since there was a transfer of goods, by the petitioner company to the Indian Railways, for a consideration and since the property in the goods also passed on to the Indian Railways, the transaction between them was undoubtedly a case purely of sale of goods and the element of service, if any, by way of heating of the food preparatory to being served to the passengers, was purely incidental and could not be said to be determinative.
In addition, the counsel for the petitioners argued that even if the transactions were to be construed as a sale of goods, such sale took place outside Delhi, when the food was served to the passengers.
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On this point, the Court held that the property in goods was transferred to the railways the moment the food was loaded on the train, i.e. the Delhi and hence the relevant tax was the Delhi VAT and not the Central Sales Tax.
Accordingly, the Court held that the respondents were entitled to demand VAT on the consideration paid by Indian Railways to the petitioners for the supply of food and beverages. Interestingly, the High Court also observed that the petitioners could claim a refund of the service tax already paid by them in respect of such transactions and that the petitioners could initiate legal proceedings in case the refund was declined. The High Court went on to state that if the service tax was sought to be levied by the tax authorities in future, the petitioners could challenge the applicability of tax by way of appropriate proceedings.
Accordingly, the High Court came to the conclusion that in the case in point, the activity of supply of food and beverages did undoubtedly answer the description of ‘sale’ within the meaning of the Delhi VAT law and was taxable therein, notwithstanding that the same activity had already borne the brunt of the service tax. While the High Court did not explicitly rule out the applicability of service tax, as a consequence of its holding the transaction to be a sale, as it was not an issue before it for determination, nevertheless it is interesting that the High Court did note that a service tax refund should be granted to the petitioners. Furthermore, the High Court suggested that “If service tax is sought to be levied, upon the petitioners, in future, in respect of such transactions, it will be open to it, to challenge the same in appropriate proceedings.” In this manner, the High Court has apparently tried to address the challenge of double taxation, as brought out in the facts of the case and as required to be done, based on the famous decision of the Supreme Court in the BSNL case.
While this is almost tantamount to a ruling by the High Court that no service tax is applicable on these transactions, it remains to be seen whether the service tax authorities accept this position or whether IRCTC would be required to follow a similar litigation process on the service tax front as well. This is the fundamental problem of double taxation that assessees continue to face, notwithstanding the BSNL judgement (supra).
The advent of the Goods and Services Tax (GST) should considerably mitigate, if not altogether eliminate, the problem of double taxation. However, due to the proposed differential GST rates for goods and for services in the initial years of the GST, the challenge will likely continue for this initial period. It is therefore imperative that these issues are addressed at the inception of the GST. Further, in the GST, the place of supply rules will determine the point of taxation, in particular the State GST. It is hoped that the advent of the GST will come about expeditiously and in the manner described.
The Author is Leader Indirect Tax Practice PricewaterhouseCoopers pwctls.nd@in.pwc.com
Supported by Rahul Renavikar and Abhishek A Ras