*THE HON’BLE SRI JUSTICE V.V.S.RAO AND * THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN + WRIT PETITION Nos.17092, 17110 AND 17130 OF 2010 Writ Petition No.17092 of 2010: % Dated 23-02-2011 # M/s. Viceroy Hotels Limited, Tank Bund Road, Hyderabad …. Petitioner Vs. $ The Commercial Tax Officer, General Bazar Circle, Hyderabad and three others. …. Respondents ! Counsel for the Petitioner: Sri S. Dwarakanath ^ Senior Standing Counsel for Customs, Central Excise and Service Tax: Sri A. Rajasekhara Reddy, ^ Senior Standing Counsel for Commercial Taxes: Sri A.V. Krishna Koundinya <GIST: > HEAD NOTE: [1] (2010) 35 VST 549 (SC) 2 [1990] 77 STC 182 (AP) 3 [2002] 126 STC 114 (SC) 4 [2001] 124 STC 426 (Kar) 5 (2006) 3 SCC 1 6 (2008) 2 SCC 614 7 (2004) 5 SCC 632 8 (2005)4 SCC 214 9 2007 (7) SCC 527 10 (2004) 137 STC 620 11 (1988) 36 ELT 201 (SC) 12 [1985] 1 SCR 432 13 (1967) 20 STC 115 14 1989(2) SCC 645 15 (1993) 1 SCC 364 16 (2000) 6 SCC 12 17 (1989) 3 SCC 634 18 2000(2) SCC 385 19 AIR 2001 SC 862 20 2003 (156) E.L.T. 17 21 (2005) 8 SCALE 784 22 Judgment in TRC Nos.154, 155, 156, 157, 160, 169, 170, 181, 205 and 243 of 2010 dated: 28.1.2011 23 [1964]3 SCR 164 24 (1994) 94 STC 422 (SC) THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN WRIT PETITION Nos.17092, 17110 AND 17130 OF 2010 COMMON ORDER: (Per Hon’ble Sri Justice Ramesh Ranganathan) These three Writ Petitions are filed by M/s Viceroy Hotels Limited. As they are inter-connected they were heard together, and are now being disposed of by a common order. The petitioner has a five star hotel at Hyderabad under the name “Marriott”. It is also a registered dealer under the A.P. VAT Act, 2005, (hereinafter referred to as the “Act”), on the rolls of the 4th respondent. The 1st respondent passed an order of assessment dated 21.1.2008, for the periods 2006-07 and 2007- 08, resulting in a tax liability of Rs.11,13,285/- and Rs.20,25,705/- respectively. Thereafter the 1st respondent issued a revised order on 26.2.2008 for the aforesaid periods resulting in a tax liability of Rs.11,13,285/- and Rs.7,76,668/- respectively. Aggrieved thereby, the petitioner preferred an appeal to the Appellate Deputy Commissioner (CT) who, by order dated 7.5.2008, partly allowed, partly remanded and partly dismissed the appeal. In so far as the 1st respondent had levied VAT on rental charges of lease equipment, the Appellate Deputy Commissioner, while observing that a perusal of the related bills/vouchers of the audio-visual equipment did not point to the transfer of the right to use goods as such, but on the contrary pointed to the fact that effective control and possession of the equipment/decoration etc., rested with the suppliers, held that this aspect needed a thorough verification with the evidence available with the petitioner. The assessment order was set aside, and the matter was remanded back to the assessing authority directing him to re do the assessment in accordance with law. The 1st respondent, thereafter, issued notice dated 8.1.2010. The petitioner filed their objections thereto on 31.3.2010. The 1st respondent, by order dated 8.4.2010, levied tax on the rental charges for lease of equipment holding that the petitioner was liable to tax under Section 4(8) of the Act, as providing equipment to their customers on rental basis for consideration amounted to transfer of the right to use goods. It is against the assessment order of the 1st respondent dated 8.4.2010 that the present writ petition is filed. In W.P. No.17110 of 2010 the order of the 1st respondent dated 26.4.2010, demanding interest, is under challenge. It is the petitioner’s case that, as the liability to tax was itself disputed, interest was payable only after 30 days from the date of receipt of the assessment order; and the petitioner had paid the entire tax demanded, vide cheques dated 7.2.2008 and 15.3.2008, even before the assessment order was passed on 08.04.2010; and the demand of interest was illegal and contrary to Section 22(1) of the Act. W.P. No.17130 of 2010 is filed questioning the order of the 1st respondent dated 28.4.2010 levying penalty of Rs.6,52,770/- at 100% of the under-declared tax under Section 53(3) of the Act. W.P. No.17092 of 2010: Sri S. Dwaraknath, Learned Counsel for the petitioner, would contend that the petitioner had already paid service tax on this transaction; they could not, simultaneously, be mulcted with liability both under the Finance Act, 1994, and the Act; since the appellate authority had recorded a finding that effective control and possession of the equipment rested with the supplier, the assessing authority had exceeded his jurisdiction in recording a finding to the contrary; in view of the order of the appellate authority, the assessing authority could not have held that there was a transfer of the right to use audio-visual equipment; the petitioner hires the equipment from their supplier who deputes his men to operate the equipment, and take it back as soon as the customer’s programme is over; neither is possession of the audio- visual equipment delivered to the customer nor is he put in effective control thereof; it is the supplier who retains control over the audio-visual equipment even during the event; effective control and possession of the equipment lay with the third party supplier, and not with the petitioner; the customer could not operate the equipment in the manner they wanted, and had to return it at the end of the event; as the equipment is operated by technically skilled personnel of the supplier alone, there is no transfer of the right to use audio-visual equipment; and, therefore, Section 4(8) of the Act is not attracted. Learned counsel would submit that the services rendered by the petitioner, i.e., of providing facilities to their customers in the form of audio-visual equipment, is as a ‘Mandap Keeper’ which is a taxable service within the ambit of the Finance Act, 1994; while the supplier had billed the petitioner, the customers were billed by the petitioner; it was a case where services were rendered by the supplier to the petitioner and, in turn, by the petitioner to their customers; the supplier had charged service tax on their bills; the petitioner had also charged service tax on their customers; since the petitioner is paying service tax, they are not liable to pay sales tax on the very same transaction; and the assessing authority had exceeded his jurisdiction in levying tax, on what is essentially a transaction of service, on the erroneous premise that it is a transaction involving transfer of the right to use the audio-visual equipment; as the petitioner had paid service tax on the consideration received for providing audio- visual equipment, parallel levy of VAT on the same turnover was not sustainable as both the levies were mutually exclusive; and, if the petitioner was declared to be liable for VAT, they were entitled for refund of service tax and vice-versa. Learned counsel would rely on Association of Leasing and Financial Service Companies v. Union of India[1]; Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer, Company Circle, Visakhapatnam[2]; State of Andhra Pradesh and Anr. v. Rashtriya Ispat Nigam Ltd.[3]; Lakshmi Audio Visual Inc. v. Assistant Commissioner of Commercial Taxes[4]; Bharat Sanchar Nigam Ltd v. Union of India[5]; Imagic Creative (P) Ltd v. CCT[6]. Sri A. Rajasekhara Reddy, Learned Senior Standing Counsel for Customs, Central Excise and Service Tax, would submit that the petitioner having paid service tax, and not having challenged the service tax assessment, cannot now contend that, if they are held liable to pay sales tax, they should be refunded the service tax paid by them; unless the service tax assessment is set aside, the question of granting refund of service tax paid by them does not arise; the department had accepted the service tax returns filed periodically by the petitioner which amounted to an assessment in law; and, having paid service tax voluntarily, it is not open to the petitioner to now contend that they should be refunded the service tax paid by them earlier. Learned Senior Standing Counsel would state that, once a transaction falls within the ambit of “taxable service” under Section 65(105) of the Finance Act, 1994, the service provider is required to pay tax on the amount relating to the service; and service tax is liable to be paid even on that part of the transaction which relates to the transfer of the right to use the audio-visual equipment, on the application of the ‘dominant nature test’. Learned counsel would rely on T.N. Kalyana Mandapam Association v. Union of India[7]; Gujarat Ambuja Cements Ltd v. Union of India[8]; Imagic Creative (P) Ltd.6; All India Federation of Tax Practitioners v. Union of India (UOI)[9]. On the other hand, Sri A.V. Krishna Koundinya, Learned Standing Counsel for Commercial Taxes, would submit that ‘dominant intention’ is no longer the applicable test; in a composite contract, sales tax can be levied to the extent it relates to the transfer of the right to use goods; burden is on the petitioner to establish that they continued to retain effective control and possession of the audio-visual equipment even during its usage; the appellate authority had held that the aspect, whether or not there was a transfer of the right to use the audio-visual equipment, needed a thorough verification with the evidence available with the petitioner; as such the matter was remitted back to the assessing authority; and the assessing authority was, therefore, justified in examining the transactions in question, and in arriving at an independent conclusion that there was a transfer of the right to use the audio-visual equipment. Learned Standing Counsel would rely on Bharat Sanchar Nigam Ltd.5; Tata Consultancy Services v. State of Andhra Pradesh[10]; and T.N. Kalyana Mandapam Assn.7. At the outset, it is necessary to note the provisions of the A.P. VAT Act, 2005 and the Finance Act, 1994 to the extent relevant herein. Section 2(28) of the Act defines ‘sale’, with all its grammatical variations and cognate expressions, to mean every transfer of property in goods, (whether as goods or in any other form in pursuance of a contract or otherwise), by one person to another in the course of trade or business for cash, or for deferred payment, or for any other valuable consideration or in the supply, distribution of goods by a society, (including a cooperative society), club, firm or association to its members, but not to include a mortgage, hypothecation or pledge or a charge on goods. Under Explanation (iv) thereto, a transfer of right to use any goods for any purpose, (whether or not for a specified period), for cash, deferred payment or other valuable consideration shall be deemed to be a “sale”. Section 2(34) (d) defines ‘tax’ to mean a tax on the sale or purchase of goods payable under the Act, and to include a tax on the 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. Section 4 of the Act relates to charge to tax and, under sub-section (8) thereof, every VAT dealer who transfers the right to use goods taxable under the Act, for any purpose whatsoever whether or not for a specified period, to any lessee or licensee for cash, deferred payment or other valuable consideration, in the course of business shall, on the total amount realised or realisable by him by way of payment in cash or otherwise on such transfer of the right to use such goods from the lessee or licensee, pay a tax for such goods at the rates specified in the Schedules. Service tax, under the Finance Act, 1994, is also a value added tax, and is a destination based consumption tax in the sense that it is on commercial activities, and is not a charge on the business but on the consumer. Broadly “services” fall into two categories, namely, property based services and performance based services. Property based services cover service providers such as architects, interior designers, real estate agents, construction services, mandapwalas, etc. Performance based services are services provided by service providers like stockbrokers, practising chartered accountants, practising cost accountants, security agencies, tour operators, event managers, travel agents, etc. (All-India Federation of Tax Practitioners9). The provisions relating to “service tax” in the Finance Act, 1994 make it clear, under Section 64(3), that the Act applies only to taxable services. Taxable services has been defined in Section 65(105). Each of the clauses of that sub-section refers to different kinds of services provided. The rate of service tax has been fixed under Section 66. Under Section 65(66), “Mandap” is defined to mean any immovable property, as defined in Section 3 of the Transfer of Property Act, 1882, and to include any furniture, fixtures, light fittings and floor coverings therein let out for consideration for organizing any official, social or business function. Under the Explanation thereto, social function includes a marriage. Section 65(67) defines “mandap keeper” to mean a person who allows temporary occupation of a mandap for a consideration for organizing any official, social or business function. Under the Explanation thereto, ‘social function’ includes marriage. Under Section 65(105)(m) ‘taxable service’ means any service provided or to be provided to any person by a mandap keeper “in relation to” the use of mandap in any manner including the facilities provided or to be provided to such person “in relation to” such use and also the services, if any, provided or to be provided as a caterer. Section 65(105) (zzw) defines ‘taxable service’ to mean any service provided or to be provided to any person by a pandal or shamiana contractor “in relation to” a pandal or shamiana in any manner, and also to include the services, if any, provided or to be provided as a caterer. The expression 'in relation to' is of wide amplitude, and is used in the expansive sense. The term 'relate' means to bring into “association” or “connection with”. The expression “in relation to” is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might have both a direct significance as well as an indirect significance depending on the context." (T.N. Kalyana Mandapam Assn.7; Doypack Systems Pvt. Ltd. v. Union of India[11]; Renusagar Power Co. Ltd. v. General Electric Company[12]) . Any service rendered by the petitioner as Mandap Keeper, in relation to the use of mandap in any manner including the facilities provided or to be provided to such a person, would alone constitute “taxable service” under the Finance Act, 1994. Sale of goods, including deemed sale in the form of transfer of the right to use goods, does not, and cannot, form part of such taxable service, and is, therefore, exigible to tax under the Act. Section 93(1) of the Finance Act, 1994 enables the Central Government, if it is satisfied that it is necessary in the public interest so to do, by a notification in the official gazette, to exempt, generally or subject to such conditions as may be specified in the notification, taxable service of any specified description from the whole or any part of the service tax leviable thereon. The Central Government, in exercise of the power conferred on it by Section 93 of the Finance Act, 1994, issued notification dated 26.06.1997 exempting an amount of service tax leviable on a Mandapam - keeper, in excess of the amount of service tax calculated on 60% of the gross amount charged from the client by the Mandapam – Keeper, for the use of the Mandapam including the facilities provided to the clients in relation to such use, and also for certain charges. The said notification also provided that the exemption shall apply only in such cases where the Mandapam -Keepers also provide catering services i.e. supply of food and drinks, and the bill issued for this purpose indicates that it is inclusive of charges for catering services. The said Notification came into force on 01.07.1997. The subject matter of tax under the provisions of the Finance Act 1994, is not the “sale of goods” but “service”. It may be that both the levies are to be measured on the same basis, but that does not make the levy the same. (Gujarat Ambuja Cements Ltd.8). The nature and character of the levy of the service tax is distinct from a tax on the sale or hire purchase of goods. (T.N. Kalyana Mandapam Assn.7). Before examining the rival contentions, we shall consider the scope and purport of Article 366(29-A)(d) of the Constitution of India, the power of the State to levy tax on the transfer of the right to use goods; and the power of the Centre to levy service tax under the Finance Act, 1994. I n A.V. Meiyappan v. Commissioner of Commercial Taxes[13], a Division bench of the Madras High Court held that mere sale of a film, regarded as material, to another by the owner of the copyright would count for nothing unless there was the conferment of a right to exploit the film; in a transaction of this kind, it was this latter right which was more valuable; and the supply of the film was ancillary to the exercise of that right. It is to remove the basis of the judgment in A.V. Meiyappan13 that clause (29-A)(d) was inserted to Article 366 by the Forty Sixth Amendment to the Constitution. Clause (29-A) of Article 366 of the Constitution provides for an inclusive definition and has two limbs. The first limb says that the tax on sale or purchase of goods includes a tax on transactions specified in sub-clauses (a) to (f). The second limb provides that such transfer, delivery or supply of goods, referred to in the first limb, shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and purchase of those goods by the person to whom such transfer, delivery or supply is made. (Association of Leasing and Financial Service Companies1). The object of the new definition, introduced in clause (29-A) of Article 366, is to enlarge the scope of ‘tax on sale or purchase of goods’ wherever it occurs in the Constitution so that it may include within its scope the transfer, delivery or supply of goods that may take place under any of the transactions referred to in sub-clauses (a) to (f) thereof wherever such transfer, delivery or supply becomes subject to levy of sales tax. (Builders’ Association of India v. Union of India[14]; Gannon Dunkerley and Co. v. State of Rajasthan[15]). The power of the States to levy taxes on the sale and purchase of goods, including “deemed” sale and purchase of goods under clause (29-A) of Article 366, is to be found only in Entry 54 of List II of the VII Schedule, and not outside it. (Builders' Assn. of India14). Article 366(29-A), as introduced by the Forty-Sixth Amendment, not being equivalent to a separate entry in List II is subject to the same discipline/limitations as Entry 54 of that list. (Bharat Sanchar Nigam Ltd.5; Builders Association of India14; Gannon Dunkerley and Co.15). The Forty Sixth amendment introduced a fiction by which six instances of transactions were treated as deemed sale of goods. (Bharat Sanchar Nigam Ltd.5). When the law creates a legal fiction, such fiction should be carried to its logical end. If the power to tax a sale, in an ordinary sense, is subject to certain conditions and restrictions imposed by the Constitution, the power to tax a transaction which is deemed to be a sale under Article 366(29-A) of the Constitution should also be subject to the same restrictions and conditions. (Builders' Assn. of India14). The said definition, as to deemed sales, will have to be read in every provision of the Constitution wherever the phrase “tax on sale or purchase of goods” occurs. (Bharat Sanchar Nigam Ltd.5). The fiction in Article 366 (29-A) operates to deem what is not otherwise a sale of goods as a sale of goods i.e. even the transfer of a right to use goods is deemed to be a sale of the goods. (Bharat Sanchar Nigam Ltd.5). The title to the goods, under sub-clause (d) of Article 366 (29-A), remains with the transferor who only transfers the right to use the goods to the purchaser. Yet, by fiction of law, it is treated as a sale. In other words, contrary to A.V. Meiyappan13, a lease of a negative print of a picture would be a sale. All the sub-clauses of Article 366(29-A) serve to bring transactions, where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act, 1930 are absent, within the ambit of purchase and sale for the purposes of levy of sales tax. Deemed sale, under each particular sub-clause of Article 366(29-A), has to be determined only within the parameters of the provisions in that sub-clause. Each fiction by which those transactions, which are not otherwise sales, are deemed to be sales independently operates only in that sub-clause. One sub-clause cannot be projected into another, and fiction upon fiction is not permissible. Article 366(29-A) has served to extend the meaning of the word “sale” to the extent stated, but no further. (Bharat Sanchar Nigam Ltd.5). Under Article 366(29-A)(d), levy of tax is not on the use of goods, but on the transfer of the right to use goods. The right to use goods accrues only on account of the transfer of the right and, unless there is a transfer of the right, the right to use does not arise. It is the transfer which is the sine qua non for the right to use any goods. If goods are available, (irrespective of where the goods are located), and a written contract is entered into between the parties, the taxable event on such a deemed sale would be the execution of the contract for the transfer of the right to use goods. Oral or implied transfer of the right to use goods may, however, be effected by delivery of the goods. (20th Century Finance Corpn. Ltd. v. State of Maharashtra[16]). The State is, however, not competent to levy sales tax on the transfer of the right to use goods, which is a deemed sale, if such sale takes place outside the State or is a sale in the course of inter-State trade or commerce or is a sale in the course of import or export. The transaction, of a transfer of the right to use goods, cannot be termed as a contract of bailment as it is a deemed sale within the meaning of the legal fiction engrafted in clause (29-A)(d) of Article 366 of the Constitution wherein the location, or the delivery, of the goods to be put to use is immaterial. (20th Century Finance Corpn. Ltd.16). Location or delivery of goods within the State cannot be made the basis for levy of tax on the sale of goods. Delivery of goods may be one of the elements of transfer of the right to use, but would not be a condition precedent for a contract of transfer of the right to use goods. Where a party has entered into a formal contract, and the goods are available for delivery irrespective of the place where they are located, the situs of such sale would be where the property in the goods passes i.e., where the contract is entered into. (20th Century Finance Corpn. Ltd.16). In order to fall within the ambit of sub-clause (d) of Article 366(29-A) all that is required is that there is a transfer of the right to use the goods. What is necessary is that the goods should be in existence so that they may be used, and the contract in respect thereof is executed. Of no relevance to the deemed