[2006] 4 STT 104 (MAG)

SALES TAX vs. SERVICE TAX

Sales tax and service tax on the same goods - Is it double taxation?
R. MURALIDHARAN*
Apparently, when sales tax and service tax areimposed on the same goods, it should amount to
double taxation. The author here cites examples of several such goods. However, the counter
argument is that unless the Constitution expressly or impliedly forbids double taxation, as long as
the statute is within the competence of the Legislature, double taxation cannot be a ground for
invalidating a fiscal statute. In fact, it appears from the Court decisions that courts have approved
sales tax and service tax on the same goods. The author also considers as to when splitting of the
sale element and the service element may be permissible.
Photography Studio
1. As per section 65(79), photography studio or agency means any professional photographer or any
person engaged in the business of rendering service relating to photography.
Section 65(105)(zb) says ‘taxable service’ means any service provided or to be provided to a customer
by a photography studio or agency in relation to photography in any manner.
Section 67 provides for inclusions and exclusions and says that the cost of unexposed photography film,
unrecovered magnetic tape or such other storage devices, if any, sold to the client during the course of
providing the service are excluded. (This definition was there till the Finance Act, 2006 came into
effect).
In this context, the argument may be that in this type of service about 80 per cent of the value of
property passed to the customer consists of cost of photographic film and hence cannot be treated as
rendering of service. It will amount to double taxation.
The argument that there is double taxation has no substance. Unless the Constitution expressly or
impliedly forbids double taxation, as long as the statute is within the competence of the Legislature,
double taxation cannot be a ground for invalidating a fiscal statute.
Sale of SIM card
2. Sale of SIM card is without doubt exigible to sales tax under the State law. The activation charges
paid are in the nature of deferred payment of consideration for the original sale or in the nature of value
addition and, therefore, also amount to sale and become exigible to sales tax.
Both the selling of the SIM card and the process of activation are ‘services’ provided by the cellular
telephone companies and squarely fall within the definition of taxable service. They are exigible to
service tax also - Escotal Mobile Communications Ltd. v. Union of India [1994-2006] STT 301/[2002]
123 Taxman 134.
Tata Consultancy Services case
3. The Supreme Court in Tata Consultancy Services v. State of AP 2004 (178) ELT 22 has held that
computer software is in nature of ‘goods’ and is subject to sales tax.
On the strength of this ruling, CBEC has issued a Circular 354/132/2005-TRU, dated October 7, 2005
holding that service tax is leviable on service on maintenance or repair of computer software by treating
software as goods.
Municipal Council Kota v. Delhi Cloth and General Mills Co. Ltd. [2001] 3 SCC 654
4. The Supreme Court has said that whatever taxes are imposed by different Legislatures or Authorities
or where one of the two alone is a tax or where it is for altogether different purposes or when it is
indirect rather than direct, there is no scope even for making any grievance of double taxation at all.
Splitting of sale element and service element is permissible only in two
definite cases of works contract and catering.
Some intangibles held to be goods by courts
5. ‘Electricity’ is goods— CST v. Madhya Pradesh Electricity Board (1970) 25 STC 188 (SC)
Though ‘Lottery ticket’ is not a physical article, it evidences right to participate in a draw and, hence, is
goods capable of being bought and sold in the market - H. Anraj v. Government of Tamil Nadu [1986] 61
STC 165 (SC).
Copyright could be regarded as goods exigible to sales tax. (1986) 1 section 414
Trade mark is intangible goods. Transfer of right to use trade mark is deemed sale and consideration is
taxable - SPS Jayam & Co. v. Registrar, TNGST (2004) 137 STC 117 (Mad).
Advance licence/REP licences have their own value. They are bought and sold as such. It by itself is a
property. For all purposes and intents, it is ‘goods’ - Vikas Sales Corpn. v. CCT (1996) 102 STC 106
(SC)
DEPB is a right to claim back credit. It is freely tradable and is goods - Philco Exports v. STO [2001]
124 STC 503 (Delhi)
Capital assets under Income-tax Act
6. For ‘capital gain’ purposes, the Income-tax law has held the following as capital assets:
a.Goodwill of a business - Haji Abdul Kader Sahib v. CIT [1961] 42 ITR 296 (Ker.).
b.Route permits for plying buses issued under Motor Vehicles Act - Addl. CIT v. Ganapathi Raju Jagi,
Sanyasi Raju [1979] 119 ITR 715 (AP).
c.The right to obtain conveyance of an immovable property - CIT v. Tata Services Ltd. [1979] 1 Taxman
427 (Bom.).
d.The right conferred on a lessee under a lease deed - A.R. Krishnamurthy A.R. Rajagopalan v. CIT
[1982] 133 ITR 922/6 Taxman 289 (Mad.)
e.The right to subscribe for shares - Hari Bros. (P) Ltd. v. ITO [1964] 52 ITR 399 (Punj).
f.A Licence granted to a company - CIT v. A.R. Damodaran [1980] Tax LR 31 (Mad.)
From the above, it is obvious that intangibles have been treated as (capital) assets under the Income-tax
Act also.
Double taxation - Meaning of
7. Double taxation means that tax is—
(a)levied on the same property or subject-matter
(b)by the same Government or authority
(c)during the same taxing period
(d)for the same purpose
Thus, strictly speaking, there is no double taxation where
(a)the taxes are imposed by different States
(b)one of the impositions is not a tax
(c)one tax is against property and the other is not a property tax
(d)the double taxation is indirect rather than direct - Escotal Mobile Communications Ltd. (supra).
From the above, it is obvious that the courts have approved sales tax and service tax on the same goods
subject to the points discussed above.
A Recent Decision
8. Splitting of sale element and service element is permissible only in two definite cases of works
contract and catering.
Goods may be tangible property or an intangible one. It would become goods, provided it has the
attributes thereof having regard to :
i.its utility
ii.its capability of being bought and sold and
iii.its capability of being transmitted transferred, delivered, stored and possessed.
If SIM Card is not sold to the subscribers but is merely part of the services rendered by the service
providers, the SIM Card cannot be charged separately to sales tax. Decision of Kerala High Court in
Escotal Mobile Communication Ltd. v. Union of India [2002] 126 STC 475 (Ker.) commented upon on
this point and remanded for fresh decision - BSNL v. Union of India [2006] 152 Taxman 135/3 STT
245.

*The author is an FCA.