S. Rahul Jain and Sahana Rajkumar

The scope and ambit of ‘goods’ has always been a contentious issue from a taxation perspective. Tax policies in India have witnessed an evolution of diverse taxes levied on the acts of production, manufacture, sale, lease and transfer of ‘goods’. Thus, situations where one has had to contend with the question of whether an article qualifies as ‘goods’ has been rather frequent.

Traditional legislative enactments such as the Constitution of India and Sale of Goods Act, 1930 were framed at a time when market conditions and human perspective had evolved to only identify a certain type of goods, mainly, items that were tangible and discernible to the naked eye. With the developments in technology, there is but no option to move beyond outdated notions and accept a more fluid definition of goods that would take within its domain even intangibles such as electronic books, music, applications etc. While legislative policies have taken their time to catch up with the technological boom, judicial intervention has played a major role in settling complex questions on whether particular articles meet the requirements of ‘goods’.

This issue has cropped up again in the context of the Income Tax Act, 1961 (“the Act”). The Finance Act, 2021 has inserted a new provision viz. Section 194Q to the Act. The same has been introduced with effect from 1st July 2021. The Section applies to any buyer who is responsible for paying any sum to any resident seller for purchase of any goods of the value or aggregate of value exceeding fifty lakh rupees in any previous year. At the time of credit of such sum to the account of the seller or at the time of payment, whichever is earlier, the buyer is required to deduct an amount equal to 0.1% of such sum exceeding fifty lakh rupees as income tax. In the previous year, a similar provision[1] which required sellers to collect tax at source from buyers of goods, was introduced.

The introduction of goods into the realm of tax deduction under Income Tax is a rather novel feature. Earlier, only salary income and service incomes were subject to tax deduction for payments made to residents in India. Yet, the legislature in their wisdom has opted to not specifically provide for a definition to the term ‘goods’ under the Act. Whether this move is a genuine oversight or a planned attempt to not limit the scope of ‘goods’ is a debate for another time.

This aim of this Article is to focus on select items that have been subject to judicial scrutiny on the question pertaining to their qualification as ‘goods’, to determine if tax is required to be collected or deducted on the sale of these items.

Goods – Meaning and Scope

It is a settled principle of law that the words used in a provision, imposing taxes or granting exemption should be understood in the same way in which they are understood in ordinary parlance in the area in which the law is in force or by the people who ordinarily deal with them.[2] Since ‘goods’ has not been defined by the Act, recourse to allied laws is permissible.

  • The Constitution of India defines ‘goods’ to include all materials, commodities and articles.[3]
  • The Sale of Goods Act, 1930 defines ‘goods’ to mean every kind of movable 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.
  • The General Clauses Act, 1897 defines “movable property” to mean “property of every description except immovable properly”.[4]
  • The expression “Immovable property” is defined to “include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth”.[5]

A bare reading of these definitions is indicative of the legislative intention to ensure a wide net that would encompass every possible kind of movable property within the ambit of ‘goods’. It is noteworthy that tax laws such as the Central Sales Tax Act, 1956, Value Added Tax (VAT) Acts and the latest Central Goods and Service Tax Act, 2017 (CGST Act) which contain specific definitions for ‘goods’, primarily draw inspiration from the Sale of Goods Act, 1930, subject to few departures.

One notable difference between the definition of goods under the Sale of Goods Act, 1930 and the CGST Act is the treatment metted out to actionable claims. While actionable claims have always been kept outside the purview of goods under the Sale of Goods Act, 1930, they are specifically included in the definition of goods under the CGST Act.

In order to determine whether a particular item is goods or not, tests have been laid by the Apex Court over the course of time. The tests that have developed are not as focused on the tangibility/intangibility of the property in question, rather the attention is more on the attributes of utility, capability of being bought and sold; and transmitted, transferred, delivered, stored and possessed.[6] In simpler terms, anything that can be brought to a market and purchased and sold is goods.[7]

Applying this understanding and placing reliance on the jurisprudence that has evolved on the subject of goods, the authors proceed to tabulate their views on whether some items qualify as goods.

Item Author’s View Supporting Authorities
Transferable Scrips such as MEIS, DEPB Scrips have their own innate value. They are freely transferable and marketable. Scrips have the necessary attributes of goods. Vikas Sales Corporation AIR 1996 SC 2082

Yasha Overseas 2015 (322) E.L.T. 7 (S.C.)

Vouchers Ordinarily, vouchers are not traded/sold and are not transferable in nature. They are usually pre-paid instruments and will not qualify as goods. However, if certain vouchers are capable of being transferred or sold, the same can be said to be goods. Sodexo SVC India Private Limited 2016 (331) ELT 0023 S.C.
Electricity Electrical energy is capable of abstraction, consumption and use. It can be transmitted, transferred, delivered, stored and possessed. It meets the requirements of movable property and therefore, goods. Madhya Pradesh Electricity Board AIR 1970 SC 732

National Thermal Power Corporation Ltd. & Ors, AIR 2002 SC 189

Development Rights Development Rights are profit a prendre, i.e., benefits arising out of land and therefore, immovable property. Thus, they are excluded from the ambit of goods.

A point to ponder upon is whether Transferable Development Right Certificates are goods? These certificates can be bought and sold and is distinct from the inherent development rights vested in the land.

Sadoday Builders Private Limited 2011 (6) Bom CR 42

Chheda Housing Development Corporation 2007 (3) MhLJ 402

Intellectual Property Rights

(IPRs)

IPRs like Trademark and Copyright are intangible incorporeal movable properties. They can be construed as goods. A.V. Meiyappan 

1967 20 STC 115 (Mad)

Software Canned and off-the shelf software are goods. They have value of their own and are capable of being bought and sold.

Unbranded software which is specialized, and tailor made to suit customers’ requirements may not qualify as goods. This transaction would lean more towards a service.

Engineering Analysis Centre of Excellence Private Limited (2021) 432 ITR 471 (SC)

Tata Consultancy Services v. State of Andhra Pradesh 2004 (178) E.L.T. 22 (S.C.)

Tata Consultancy Services vs. Commissioner of Trade Tax 2020 (40) G.S.T.L. 4 (All.)

Lottery Tickets Lottery tickets are actionable claims. Such actionable claims are goods in terms of the definition provided for under the Constitution. Skill Lotto Solutions Pvt. Ltd. 2020 (43) G.S.T.L. 289 (S.C.)
Live Animals and Birds Animals/birds in captivity will be construed as property and therefore, goods. K.G. Abraham (1960) 11 STC 291 (Ker)
Drawings and Designs Drawings and designs are goods. What is of value maybe the advice/technology, i.e., the intangible asset contained in the drawing/design. However, once the same is put on a media such as paper or pen drive, the same will partake the character of chattel and therefore, goods. Associated Cement Companies Ltd. 2001 (128) E.L.T. 21 (S.C.)
Works Contract Transfer of property in goods in a works contract was specifically brought within the ambit of sale through a Constitutional Amendment. Subsequently, state legislations governing sale of goods also sought to cover the transaction within the ambit of sale. But, for the specific fiction categorising the transfer of property as a sale, works contract could not have been subject to sales tax. The Income Tax Act does not carve out such a fiction in order to treat the goods component in works contract as sale. In the absence of the same, it may be possible for tax deductors to contend that works contract must not be subject to the rigours of Section 194-Q. [8]

It is anticipated that the above tabulation would assist buyers/sellers in determining the applicability of Section 194Q/Section 206C(1H) of the Act in situations where any of the said items are the subject matter of a purchase/sale.

It is worthwhile to note that a Circular issued by CBDT[9] has specifically clarified on the applicability of Section 194Q to transactions carried out over exchanges. It has been explained that Section 194Q shall not apply to securities/commodities traded over stock exchanges and electricity/power certificates sold through power exchanges.  The reason for this clarification is attributable to the fact that sometimes there is no one to one contract between buyers and sellers operating on these exchanges. One could infer from the same, that securities and electricity are otherwise goods that are capable of being bought and sold, thereby, attracting Section 194Q.

Conclusion

Considering the ambiguities surrounding this issue and the complex jurisprudence that has evolved, it is no doubt an uphill task for assessees to determine if items purchased or sold by them constitute goods on a case to case basis. While this subject has remained controversial for its complexities, time has come for the legislature to either clearly define the scope of ‘goods’ through appropriate legislative intervention or issue a Circular under Section 194Q laying down guidelines, especially in relation to some of the above discussed goods that are capable of dual views. This would go a long way in rendering provisions such as Section 194Q, effective.

[The authors are Joint Partner and Principal Associate, respectively, in Tax practice at Lakshmikumaran & Sridharan Attorneys, Chennai]

[1] Section 206C(1H) of the Income Tax Act, 1961.

[2] Collector of Excise vs. M/s Parle Exports (P) Ltd. (1989) 1 SCC 345.

[3] Article 366(12) of the Constitution of India.

[4] Section 3(36) of General Clauses Act, 1897.

[5] Section 3(26) of General Clauses Act, 1897.

[6] Tata Consultancy Services 2004 (11) TMI 11 – SUPREME COURT.

[7] South Bihar Sugar Mills 1968 (2) TMI 36 – SUPREME COURT.

[8] A transaction of works contract may be subject to the provisions of Section 194-C in which case the provisions of Section 194-Q will not be applicable.

[9] Circular No. 13 of 2021 dated 30th June 2021.

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Lakshmikumaran & Sridharan (L&S) is a full-service law firm based in India. The firm has offices in 14 cities across India and has over 400 professionals specializing in areas such as corporate & commercial laws, dispute resolution, international trade, taxation and intellectual property View Full Profile

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