Sukumar Mukhopadhyay: Sales and service: are they the same?

The Kelkar task force report has proposed that service tax should be imposed on the sale of goods right up to the retail stage. The report says, "...the value addition in the post-manufacturing stage is in the nature of services" (page 55). The whole edifice of the goods and services tax (GST) in the report rests on this assumption. But are service and sale the same?

It is common sense that a sale deals with tangibles and a service with intangibles. But in law and in economics postulates have to be proved beyond common-sense. So we begin with a fundamental legal proposition. The levy of tax depends on what is known in law as a "taxable event". In the case of excise the taxable event is the act of manufacture, in the case of customs duty it is the act of import, in the case of sale tax it is the act of sale and in the case of service tax it is the act of providing of service.

If the taxable events are different then the taxes are also different. The Supreme Court has clarified in a landmark judgement on a Presidential reference in 1962 (reported in 1963 AIR SC 1760) that "in one case (excise) the imposition is on the act of manufacture or production while in the other (sale tax) it is on the act of sale."

So it is clear that if the taxable event is an act of sale, the tax that can be imposed can only be sales tax. Similarly, if the taxable event is providing a service, it can only be service tax.

Some controversy has been created in marginal and overlapping cases where goods and service are delivered together "" serving food in a restaurant, printing question papers, selling news to agencies and so on. Actually, there is no confusion in the concepts; there are only controversies in individual instances.

Food served in an eating house had been judged as a service but the Supreme Court [in a judgement reported in (1980) 45 STC 218 (SC)] has finally settled that if it is established on facts that the substance of the transaction is a sale of food and that the rendering of service is merely incidental, the transaction would be eligible for sale tax.

In the case of printing question papers, the Supreme Court, in State of Tamil Nadu vs Viswanathan [reported in (1989) 73 STC 1 (SC)], that printing question papers for a university is a delicate matter of trust and confidentiality and the paper cost is nominal. So it is a service, though the paper cost can be charged to sales tax.

Next is the question about news service. On the basis of judgements of Supreme Court as in the case of Hindustan Shipyard vs State of AP [reported in (2000) 119 STC 53 (SC)], it can be said that they are not a service but a sale and so liable to sales tax, not service tax.

The report has relied on a judgement of Kerala High Court in the case of Escotel Mobile vs UOI, [(2002) 126 STC 475], to say that sales tax and service tax can be levied on the transaction of the sale of a SIM card and fixing connection. This judgement is under review by the Supreme Court and, therefore, cannot be relied upon.

What is common in all these judgements is that they have never equated sales with service but have tried to find out if the taxable event is a sale or a service where the two elements are delivered together. No judgement has said that service tax can be charged when it is a sale.

In the CSO [Central Statistical Organisation] National Accounts Statistics, trade (sale of goods) is classified under the tertiary sector since it cannot be classified under the primary or secondary sectors. But merely being in the tertiary sector does not make it a service. When the CSO gives the list of potentially taxable services, it does not mention trade.

Neither has trade been included in the World Trade Organisation classification of service sectors. What have been included are wholesale services and retailing services along with commission agents' services and services relating to manufacturing. Here the item refers to service relating to trade such as Internet delivery. It refers to "distribution service" and not "sale" as such.

The crux of the distinction is that in the case of a sale the goods exist as property of the seller before these are handed over to the buyer but in case of a service the goods emerge by way of or in course of rendering the service. Thus, there is no question of charging service tax on value addition in the post-manufacturing stage of retail trade, as the report has proposed.

(The writer is former member, Central Board of Excise and Customs. He can be contacted at smukher2000@yahoo.com)