The Budget 2008 was introduced on 29.02.2008 wherein certain new services were proposed to be brought under the service tax net. This was a customary step taken by the Finance Minister (FM) as is done every year.
The experts and the common public at large has now come to understand very well that the devil of the budget is in the fine print especially in case of budgets drafted by Mr. Chidambaram.
This year there has been one such aberration which in my opinion can become a real problem for the transport industry as a whole, it is in the case of introduction of new section 65 (105) (zzzzj) in the Finance Act, 1994 wherein the services provided in relation to Supply of tangible goods by any person to any other person have been made taxable with effect from 16.05.2008.
Brief understanding of the new section ?
- The section thus reads as follows:
Taxable Service means services provided or to be provided:
“to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances;”;
From the above section there are 3 ingredients which come to notice:
- The service essentially has to be in relation to supply of tangible GOODS to any person by any other person;
- there must not be any transfer of right of possession of the goods from the service provider to the service recipient;
- there must not be any transfer of effective control of the goods from the service provider to the service recipient.
Hence if the above 3 criteria’s are fulfilled in a commercial transaction than the same would be liable to service tax from 16.05.2008.
Lets dissect the said section further by exploring the meaning of important words used therein:
Meaning of tangible in law “is the attribute of being detectable with the senses”.
Goods has not been specifically defined in the Finance Act, 1994 but as per section 65 (50) thereof the meaning as assigned to it in section 2 (7) of the Sale of Goods Act, 1930 shall be taken. Goods there have been defined as under:
"goods" means every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;
Therefore all things which are movable except money and actionable claims can be categorized to be GOODS.
In the same line one can safely conclude that TRUCKS are both – tangible and goods.
RIGHT OF POSSESSION AND CONTROL:
In general practice Possession has been the meaning - “exclusive practical control of a thing, in the context of the legal implications of that control”
Similarly Control can be taken to mean “the power to influence people’s behaviour or the course of events”
Summarization of the whole meaning and where it leads us:
It can be clearly understood from the above discussion that all kinds of supply/lease/renting of goods which also include machinery, appliances and equipments FOR USE will be taxable from 16.05.2008 given that the service provider does not transfer the right of possession and effective control to the service recipient.
Lets understand the same through an example:
A company is providing computers on rental basis to its clients for a period of 6 months for a consideration of Rs. 1500/- per computer per month. Here the company has supplied/provided computers on rent and computers are Goods but as can be noticed that the owner of computers has also parted with the right of possession and effective control in favour of the user because the user will having unchecked – unhindered possession of the computers. So the above transaction satisfies only 1 criteria out of the 3 mentioned above and therefore the same would NOT be liable to service tax.
But imagine in the same transaction if the computers are supplied alongwith manpower to help the user use them and has stipulated in the contract that no one other than his personnel would use those computers – in other words the owner company is providing computers as well as manpower to operate under one single contract than in that case it can be safely said that all the three criterias are fulfilled and the transaction shall become taxable from 16.05.2008.
Service tax Vs. VAT
The Board has come out with any internal circular/letter F.No. 341/1/2008 dated 29.02.2008 which is issued to its rank and file wherein it has tried to define the differential nexus between supply of goods in the case of VAT (Sales Tax) and service tax.
In paragraph 4.4.1 thereof the Board has said,
4.4.1. Transfer of right to use any goods is leviable to sales tax/VAT as deemed sale of goods [Article 366 (29A) (d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods.
4.4.2 Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes etc., ………………… are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service.
4.4.3 Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT/sales tax as deemed sale of goods, is not covered under the scope of proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether VAT is payable or paid.
The above words coming from the Board itself can be termed as a good definition of what is taxable and what is not and the premises on which each transaction needs to be evaluated.
The last line in the board circular is very important because it concludes by saying that whether a transaction is taxable or not can be evaluated by considering the facts that the assessee in question is paying VAT/sales tax on the value of the transaction or not, if he is not paying VAT than in that case he ought to be paying Service tax.
Applicability to Truck owners
After discussing the provisions in their entirety I will now come to the main reason for writing this article. It relates to the applicability of the above discussed section to the transactions entered into by the transport industry as a whole. It would be prudent to note that the modus operandi discussed hereunder is followed by not less than 60% of the industry. It makes a small thing big when compared with the humongous size this industry is and its direct relation with the inflation cycle of the Indian Economy as a whole.
Modus Operandi of transport industry:
Lets take a hypothetically situation to understand the way the transport industry works in India:
A Company XYZ wants to send some goods from Ahmedabad to Bombay and hence contacts a Booking agent (BA) to help him do so. The BA in turn contacts a Truck Owner (TO) to send him a truck with a driver and cleaner for the said journey.
The Truck owner asks for Rs. 10000/- from the BA and the BA in turn asks for Rs. 11000/- from the XYZ company. The consignment note in the above example will issued by the BA in his own name. The XYZ company pays the freight to the BA and also deposits Service tax @ 3.09 % of Rs. 11000/- to the Government under the GTA head. So far as the transaction between XYZ and BA is concerned the same categorically comes under the GTA head and it suffers taxation also. But the transaction between TO and BA was not subjected to tax until 16.05.2008.
Whether the transaction between TO and BA fulfil the 3 conditions mentioned above:
1. Supply of goods: The truck owner supplies truck to the BA and trucks are tangible goods.
2. Right of Possession: The TO provides the truck alongwith his driver and cleaner and hence it can be said that the right of possession is not parted with.
3. Right of effective control: The truck is provided for a pre-decided journey which is from Ahmedabad to Mumbai and the BA is not given the right to change the same at any cost and if he does so than the driver of the truck can and will refuse to do so unless the TO confirms the changes to him, hence the effective control is also not parted with.
So all the three conditions/criteria are being met.
So the million dollar question that will arise is that, should we conclude that the transaction between the TO and the BA as reflected above will be taxable under section 65 (105) (zzzzj) ibid.
I think the interpretation done above is perfectly in order but in the same vein I also think that it is and cannot be the intention of the Government of India and the Parliament to tax the transport industry in such a manner.
My belief stems from the following 2 reasons:
- The whole transaction between the TO – BA and the customer will be chargeable to a phenomenal 15.45% tax (12.36% on the first leg + 3.09% on the second leg) because in another change brought in by notifications 10/2008 of Central Excise, 12/2008 and 13/2008 of service tax whereby the BA agent will not be able to avail and utilize the credit of the service tax charged by the TO to the BA.
- The inflationary cost of such a move would be immense and irreparable.
Hence the devil that has somehow crept into the newly introduced law must be pulled out at any cost immediately either by way of an amendment or by way of a notification under section 93 of the Finance Act, 1994. I would not call for a clarification by way of a circular or a trade notice, because in the past these documents have proved to be worthless in honourable Tribunals, Advance Rulings and Courts of law. Recent advance ruling in case of builders/developers/promoters is a case in point.
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