Case Law Details
Dabur Research Foundation Vs Commissioner of Customs (CESTAT Allahabad)
Introduction: The case of Dabur Research Foundation vs Commissioner of Customs (CESTAT Allahabad) revolves around the issue of whether the payment of VAT/Sales Tax on deemed sales is sufficient to exclude the transaction from service tax liability. The appellant, Dabur Research Foundation, challenged the order passed by the Commissioner (Appeals), Customs, Central Excise & Service Tax, Ghaziabad.
Detailed Analysis: The appellant, a non-profit organization, provided integrated research solutions in pre-clinical biology to pharmaceutical, chemical, and biotechnology companies. They entered into an Asset Licensing Agreement with Fresenius Kabi Oncology Limited (FKOL) and received payments towards license fees. The appellant had paid Sales Tax (VAT) on these payments, considering them as deemed sales.
However, during an audit by the Central Excise Commissionerate, it was observed that the appellant received payments for the service of ‘Supply of Tangible Goods’ under the agreement with FKOL. A show cause notice was issued, proposing a demand for service tax.
The appellant contested the notice, arguing that since they had paid VAT on the transactions, they were not liable to pay service tax. They relied on Circulars and judicial precedents to support their contention.
The Commissioner (Appeals) upheld the demand for service tax, stating that the payment of VAT/Sales Tax does not conclusively exclude the transaction from service tax liability. They also highlighted clauses in the agreement between the appellant and FKOL, indicating that the appellant retained control over the goods.
However, the appellant argued that they had transferred only the right to use the goods to FKOL, not the title, and therefore, the transactions amounted to deemed sales. They also contested the findings regarding discrepancies in VAT payments.
Conclusion: After considering the arguments and examining the agreement between the parties, the CESTAT Allahabad set aside the impugned order and allowed the appeal. The tribunal held that the appellant had granted exclusive right to use the goods to FKOL without disturbance, which constituted deemed sales. Consequently, the tribunal ruled that service tax was not attracted to these transactions.
This judgment clarifies that the payment of VAT/Sales Tax on deemed sales does not automatically exclude the transaction from service tax liability. Each case must be examined based on its merits and the terms of the agreement between the parties.
FULL TEXT OF THE CESTAT ALLAHABAD ORDER
The present appeal has been filed by the Appellant assailing the Order-In-Appeal No.GZB-EXCUS-000-APP-44-14-15 dated 08.09.2014 passed by the learned Commissioner (Appeals), Customs, Central Excise & Service Tax, Ghaziabad.
2. The facts of the case in brief are that the Appellant is a non-profit making organization registered as a company incorporated under Section 25 of the Companies Act, 1956. During the relevant period, the Appellant was approved by the Department of Science and Technology and was providing ‘Integrated Research Solutions’ in Pre-Clinical Biology to National and International pharmaceutical, chemical and Biotechnology companies. The Appellant provides comprehensive range of services for pharmacological, biological and analytical testing of drugs and chemicals.
3. The Appellant entered into an Asset Licensing Agreement dated 19.05.2009 with M/s. Fresenius Kabi Oncology Limited.1
4. During the relevant period, the Appellant had received Rs.3,92,00,000/- from FKOL towards license fee under the abovementioned agreement. On the said payments received by the Appellant from FKOL, (being towards deemed sale), the Appellant had already paid Sales Tax (VAT), as applicable under the Uttar Pradesh Value Added Tax Act and assessed accordingly.
5. The Appellant’s records were audited by the audit party of the Central Excise Commissionerate, Ghaziabad on 01.11.2010 and 18.11.2010, wherein during the course of audit, the department observed vide DAR No177/2010-11 dated 15.02.2011, that the Appellant had received payments against the service – ‘Supply of Tangible Goods’ under the agreement entered into with FKOL.
6. Subsequently, correspondence took place between the Appellant and the Department by which information regarding the transaction was sought by the Department and provided by the Appellant.
7. Thereafter, the Department issued a Show Cause Notice bearing No.20/ST/JC/GZB/2012-13 dated 13.02.2013, proposing demand of Rs.44,41,360/- and the Appellant contested and filed its reply.
8. The Adjudicating Authority vide the Order-In-Original dated 30 March, 2013 confirmed the allegation and demands made in the SCN and imposed equal penalty under Section 78 and penalty of Rs.10,000/- under Section 77 of the Finance Act, 1944. Being aggrieved, The Appellant filed an appeal before the learned Commissioner (Appeals). Learned Commissioner (Appeals) in the impugned Order-In-Appeal, recalculated the demand to Rs.39,86,350/-. Hence the present appeal before the Tribunal.
9. Ld. Counsel appearing on behalf of the Appellant urges as under:-
9.1 It is urged that the taxable service with reference to ‘supply of tangible goods’ has been defined under Section 65(105)(zzzz) of the Finance Act, 1994 and reads as under:-
“Taxable service means any service provided to any person, by any 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.”
(emp. Supplied)
9.2 The scope of service was clarified by the Government vide D.O.F. No.334/1/2008-TRU dated 29.02.2008 as under:-
“4.4 Supply of tangible goods for use:
4.4.1 Transfer of the 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., offshore construction vessels & barges, geo-technical vessels, tug and barge flotillas, rigs and high value machineries 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 the 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 or not VAT is payable or paid.
(emp. Supplied)
9.3 That the Appellant discharged VAT on the transaction and the VAT authorities already concluded the assessment proceedings in respect of the same transaction, considering the transaction as the transfer of right to use goods. Therefore, in terms of the above referred Circular, the same transaction is not taxable under the Service tax. Further reliance is placed on the decision of this Tribunal in the matter of M/s. Rockwell Automation India (P) Ltd. vs. CCE, Ghaziabad passed vide Final Order No.70660-70662/2019 dated 25.03.2019 in which held as follows:
“6. Having considered the submissions from both the sides and on perusal of record we note that it was submitted before the original authority that the said consideration on which Service Tax was demanded was subjected to sales tax and original authority has not relied upon any evidence to establish that the said contention was unfounded. Further we have also perused the invoices which were available on record which clearly indicated that the entire transactions in such invoices was subjected to sales tax. We therefore are of the opinion that the impugned orders are not sustainable. We therefore set aside the impugned orders and allow all the three appeals.”
(emp.supplied)
9.4 That consequent upon the 46th amendment, Article 366(29A)(d) of the Constitution of India defines tax on sale or purchase of goods includes a tax on the transfer of right to use any goods for any purpose for cash, deferred payment or other valuable consideration.
9.5 The aforementioned constitutional provisions have been the subject matter of interpretation by various courts. The Hon’ble Supreme Court in the case of Bharat Sanchar Nigam Ltd v. UOI [2006 (2) STR 161. (SC)] has discussed the different aspects involved in such transaction and came to the conclusion that to constitute a transaction for “transfer of right to use the goods” the transaction must have the following attributes:
a. There must be goods available for delivery.
b. There must be consensus ad idem as to the identity of the goods.
c. The transferee should have a legal right to use the goods -consequently all the legal consequences of such use including any permission or licenses required therefore should be available to the transferee.
d. For the period during which the transferee has such right, it has to be to the exclusion of the transferor, this is the necessary concomitant of the plain language of the statute- viz a “transfer of the right to use” and not merely a license to use the goods;
e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.
9.6 The Commissioner (Appeals) concluded that in the case of the Appellant, the above condition of (d) and (e) are not satisfied.
9.7 The appellant urges, that the above finding establishes that the goods were exclusively given for use to the customer of the Appellant, and they were free to use the goods. The agreement provides that even if the Appellant transfers title of the goods, the right of the Customer will be protected. Clause 2.7 of the Agreements read as follows:
“In the event that DRF decides to sell its rights, title or interest in the imported assets during the term or the extended term, DRF shall take prior consent from FKOL and further ensure that the rights of KFOL under this agreement are preserved and are not prejudicially affected.”
9.8 It is further urged that the above clause establishes that during the subsistence of the Agreement, the right of the customer cannot be again assigned by the Appellant to anyone else. Therefore, the finding and the conclusions are incorrect factually.
9.9 The learned counsel vehemently argued that the Appellant transferred the Right to use the goods to the customer and the title of the goods was not transferred. The transfer of the Right to use the goods amounted to ‘deemed sale’ whereas transfer of title amounts to sale. Even after the transfer of right to use the goods, the Appellant continued to be the owner of the goods, therefore, the customer of the Appellant cannot get an absolute right to use the goods in any manner or for any purpose. The transfer of right to use goods, always provides the manner and purpose for which the goods maybe used.
9.10 Further, with the transfer of right to use goods, the transferee does not acquire the title of the goods, therefore, such transferee may not be allowed to assign or sublicense the goods to others.
9.11 Further, the reliance placed by the Commissioner (Appeals) on the decision in the matter of Indus Tower Ltd. [2012 (285) E.L.T. 3 (kar.)] was wrong, because in that case the facts were different: it was noted as follows:
“What is permitted under the contract is, a permission in the nature of a licence to have access to the passive infrastructure and permission to keep the equipments of the mobile operator in the pre-fabricated shelter with permission to have ingress and egress only to the authorised representatives of the mobile operator”.
9.12 Whereas in the present case, the customer was having right to use the goods for the purpose of doing research as contemplated under the Agreement.
9.13 It is also submitted that since the transaction was only a deemed sale, therefore, the sales tax was paid as and when consideration for such a transaction of right to use was received. In such cases, sales tax is not paid at the time of agreement to transfer the right to use goods.
9.14 The finding regarding discrepancy in payment received and payment of VAT under paragraph 5.8 is factually incorrect, as the court below have not taken into account the amount of additional VAT paid (which was payable in addition to normal applicable VAT). The amount of the transaction was INR 1,11,96,172.25 plus VAT amount INR 4,47,846.89 (@4%)plus additional VAT INR 55,980.75 (@0.5%) Totalling to INR 1,17,00,000/.
9.15 In the light of the above submissions, it is urged that the findings in the Impugned Orders are not sustainable. Thus, the Impugned Orders are liable to be set aside.
10. Ld. Departmental Representative justifies the impugned order.
11. Heard both sides and perused the appeal records.
12. We find that ld. Commissioner (Appeals) has observed that in the instant case the custody of the assets was given to FKOL, as they were granted Exclusive Licence to use the goods, but they had no possession and effective control of the goods and neither were free to make use of the said assets in the manner and purpose other than as specified in the said agreement. Nor FKOL were free to allow/assign or licence the goods for use by others. Further, FKOL was not free to remove these assets from the premises of the Appellant. Further observed as per Clause 2.7 of the agreement, that during the terms of the agreement the Appellant can sell its right or interest on the said assets. This agreement only allows FKOL to use the laboratory infrastructure developed by the Appellant for a specific purpose of oncological research, without transferring the possession or control. Thus, while FKOL had access to infrastructure in question, the Appellant did not lose control over the said infrastructure, which is evident from the written terms of the contract between the parties. It was further held by the Commissioner (Appeals) that the contention of the Appellant as regards the payment of VAT/Sales Tax considering the transaction as deemed sale, is also not conclusive for exclusion from the purview of service tax. Further, observed that where the goods to be transferred are available and a written contract is executed between the parties, it is the point of situs or taxable event on the transfer of right to use the goods would occur, and situs of sale of such transaction would be the place, where the contract is executed.
13. From the aforementioned facts on record by the court below, we are satisfied that the exclusive possession with right to use the goods was given by the Appellant to M/s. FKOL, who were free to use the goods. We further find from the Clause 2.7 of the agreement, which provides that even if the Appellant decides to sell or transfer its right, title or interest in the goods during the term or the extended term for right to use granted, the Appellant shall take prior consent from FKOL and further ensure that right to use of FKOL under the agreement are not disturbed/preserved and their interest is not prejudicially effected. Thus, evidently, the Appellant had granted exclusive right to use without disturbance or encumbrance to their clients – FKOL and accordingly, we hold that they have rightly paid the Sales Tax/VAT on transfer of right to use the goods, to their customers, which is a transaction of deemed sale. Accordingly, we hold that service tax is not attracted.
14. Accordingly, in view of our aforementioned observations, we set aside the impugned order and allow the appeal with consequential benefits to the Appellant, in accordance with law.
(Pronounced in open court on 09.02.2024)
Notes :
1 FKOL
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