Analysing the Judgement of Hon’ble Bombay HC holding meal vouchers as ‘Goods’ & Implications

Recently the Hon’ble High Court of Bombay have pronounced an order which is a land mark judgment for Indian E-commerce Industry specifically and including Coupon / voucher sub-industry considering the vacuum of judicial pronouncements on this aspect. The matter relates to CWP No. 5653 of 2010 & 7503 of 2013 decided on 20^th March, 2015 in case of M/s Sodexo SVC India Private Limited vs. The State of Maharasthra & others in Hon’ble Bombay HC where the basic issue required to be addressed by the court was,  

Facts of the Case – The Arrangement

·         M/s Sodexo SVC India Private Limited (hereinafter referred to as ‘Petitioner’ / ‘Sodexo’) is engaged in conducting a business of providing pre­printed Sodexo Meal   Vouchers (“Vouchers"). Sodexo  enters  into  a  contract  with  its  customers  for  issuing  the  said vouchers (Say Rs 100/- face value). The  customers  in  turn  distribute  the  said vouchers  to  their  employees  who  are  the  actual  users  of  the  said vouchers. It  is  stated  that  Sodexo has  contracts  with various  affiliates  such  as  restaurants,  departmental  stores,  shops,  etc. Under  the  affiliate  contracts,  the  affiliates  are  required  to  provide  food and  other  items  on  presentation  of  the  said  vouchers  by  the  users. The affiliates  are  bound  to  honour  vouchers  once  presented  by  the  users. The  affiliates  after  receiving  the  said  vouchers,  present  the  same  to  Sodexo. On   receipt   of   the   vouchers,   Sodexo reimburses the affiliates after deducting service charges (say Rs 15/-). 

·         To operate such a model of paper based voucher, Sodexo had obtained  certificate  of  authorization  from  the  Reserve Bank  of  India  under  Section  7  of  the  Payment  and  Settlement  Systems Act, 2007 to  operate  a  payment system  for  issue  of  meal  and  gift  vouchers  in  the  form  of  'paper  based vouchers'  and  'smart  meal  cards'  with  effect  from  25th  June  2009.

The Issues

·         Whether  the  Sodexo  Meal  Vouchers  are  ‘goods’  for  the purposes  of  levy  of  Octroi  and  LBT  ?

·         Whether  a  Municipal  Corporation constituted  under the  Maharashtra  Municipal  Corporations  Act,  1949  is entitled  to  levy  and/or  collect  Octroi  or  Local  Body Tax  (LBT)  on  Sodexo  Meal  Vouchers  in  accordance with  the  provisions  of  the  Maharashtra  Municipal Corporations   Act,1949 and the Rules framed thereunder?

Petitioner’s Contention

·         The said vouchers  are nothing but  payment  instructions  or  payment  instruments  issued  under a  payment  system  operated  under  the  said  Act  of  2007  as  per  the authorization  received  from  the  Reserve  Bank  of  India.

·         Under  both  the  Octroi  Rules  and  the  LBT  Rules,  the  taxes  can  be collected  on  the  goods. Incidentally, since the octroi and LBT legislation does not throw light on definition of ‘Goods’ inference can be drawn on the other provisions of the Act i.e. Octroi  or  LBT  can  be  levied  on  the  consumption, use  or  sale  of  goods  within  the  limits  of  Municipal  Corporations. The  said  vouchers  are  a  medium  to  acquire  any  article  for consumption,  use  or  sale  and  the  said  vouchers  are  not  capable  of consumption,  use  or  sale  by  themselves. Simply to say that the said vouchers are only medium of payment.

·         Vouchers are similar to ‘Lottery tickets’ which held not be ‘goods’ by relying on Sunrise Associates  v.  NCT  of  Delhi (2006)5 SCC 603

·         Vouchers are similar to ‘papers and files in possession of a legal practioner’ by relying on R.D.Saxena  v.  Balram  Prasad  Sharma (2000)7 SCC 264

·         He placed reliance on State Bank  of  India v.  Neela  Ashok  Naik  and  Another AIR 2000 Bom. (151) wherein fixed deposit receipts were held to be goods on their characteristic of being capable to be sold, purchased or consumed, but the said vouchers do not possess any such charactersictic.

·         He also relied on other judgements viz Bharat  Sanchar  Nigam  Ltd.  and  Another  v.  Union  of  India  and  Others (2006)3 SCC 1 & TATA  Consultancy  Services  v. State  of  Andhra  Pradesh (2005)1 SCC 308 for laying down the characteristics of ‘goods’ and justifying as to said vouchers do not stand as ‘goods’ within the prescribed characteristics.

Revenue’s Contention

·         Revenue simply relied upon on the thesis that said vouchers were capable  of  use and/or  consumption  as  well  as  sale  within  the  limits  of  the  Municipal Corporations.

·         In support of above, revenue  relied  upon  a  decision  of  the  Division  Bench  in  the  case of  Maharashtra  Chamber  of  Commerce  Industries  &  Agriculture  &  Others v.  State  of  Maharashtra ,  through  its  Secretary  &  Others 2004(1) Bom.C.R. 137  and  Small  Scale Interpreneurs  Association  and  Others  v.  State  of  Maharashtra  and  Others 2007(3) Bom.C.R. 496.

Key Judicial Lay-downs

·         The   said   vouchers   are   capable   of   being   sold   by   the Petitioner  after  they  are  brought  into  the  limits  of  the  City. In  fact, going  by  the  scheme  narrated  above,  the  said  vouchers  are  sold  by  the petitioner  to  its  customers  for  value.

·         Relying on Tata Consultancy services (supra), court pointed that  (Para 81)

'Goods'  may  be  a  tangible  property  or  an intangible  one.  It  would  become  goods  provided  it has  the  attributes  thereof  having  regard  to  (a)  its utility;  (b)  capable  of  being  bought  and  sold;  and (c)  capable  of  transmitted,  transferred,  delivered, stored   and   possessed.

Going  by  the  test  laid  down  in  Paragraph  81  of  the  said decision  of  the  Apex  Court  in  the  case  of  TATA  Consultancy  Services,  the said  vouchers  have  its  utility,  the  same  are  capable  of  being  bought  or sold  and  the  same  are  capable  of  being  delivered,  stored  and  possessed. Hence said vouchers are in the nature of ‘goods’.

·         Citing the examples of several instances viz lottery tickets, Fixed deposit receipts and electromagnetic waves held that such printed paper vouchers are in the nature of ‘goods’ and are not in the nature of actionable claim. The said voucher cannot be equated with lottery ticket or electromagnetic waves.

How this Judgement opens up Pandora Box?

·         The judgment was limited only to determine the applicability of LBT and/or Octroi in respect of sale of Sodexo Meal Vouchers within the local municipality. Such judgment, though has left open the issue of whether such meal vouchers would qualify as 'goods' for other Acts as well.

·         Is it that the test laid out in TCS’s (Supra) and other cases referred to above conclusive to identify whether a particular item to be goods?

·         If such vouchers are held to be goods, will the redemption of such voucher tantamount to barter transaction?

·         Can this judgement have implications on coupons, gift cards and gift vouchers remains a point to ponder?

·         A lot many issues which arise because of this judgment remains unanswered and requires due consideration

·         Paper based voucher is similar to cases of cash cards used by several malls and retail outlets which create virtual currency on the card against which items can be purchased from retail outlets, does this sought of virtual currency also qualify to be ‘goods’?.

Before Parting..

The decision of Hon’ble HC in the above case can lead to wide implications and the ones which might to un conductive to the trade and potentially lead to double taxation with ancillary implications. Industry though shall push the caution button to ensure that the mitigation strategy shall be duly implemented. Further, one may absurdly even see advance payment (as similar to said voucher) as ‘Goods’ by applying this ratio laid down! 

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Simplifying Delhi Value Added Tax – Legal & Procedural Relaxations Expected

Simplifying Delhi Value Added Tax – Legal & Procedural Relaxations Expected

By CA Ankit Gulgulia (Jain)

ankitgulgulia@gmail.com

Delhi Value added tax simplification has been one of major agendas of all state governments. It has been largely felt and outlined that procedural relaxation is a must to ensure smooth trade in the city or outside. At the same time it is well understood that blanket relaxations would have the other side of the coin also and can lead to undesirable situation for the government including unethical revenue leakages.

Considering the upcoming Delhi budget, few of the relaxations on both legal and procedural ends can be as under:-

A) Procedural Changes

1) 2A-2B Mismatch Assessment

Mismatch assessments based on 2A-2B filed by purchasers and sellers have been a major obstacle for traders in Delhi. One needs to keep a check literally on the all vendors he deals with and even enquire on his tax filing status and tax paid by his vendor. The situation is clearly undesirable as even the bonafide purchasers are being made to suffer on non-compliances by selling dealers.

Even the law backs this undesirable situation as the input tax credit can be disallowed to purchasing dealer if the selling dealer has not paid tax and not filed his return correctly allocating buyer’s TIN in his returns.

A simple solution to this can be linking 2A-2B on invoice based mechanism. Once individual invoices can be generated and linked directly from dvat system this hassle can be neutralized effectively. Though making such infrastructure can be challenging.

2) T-2 Relaxation

Currently Form T-2 is required to be filed for all the goods entering in Delhi except in few cases including GTO being less than 1 Crore. It is noteworthy that recently even Haryana government abolished its similar transit form VAT D-3 in light of its cumbersomeness. T-2 can be either abolished and state tracking can be maintained at border level or the limits can be raised to say a GTO of 5 Crores or more.

3) Hard Copy filing of DVAT-56

Currently in Delhi, if you have filed a return without using digital signature then one must deposit the hard filed copy of dvat-56 within prescribed time to avoid the late fees. This hard filing can be eliminated to move to paperless concept on similar track of ACES (Service tax and Central Excise return filing).

4) WCT Certificates hard copy submission

In case of contractee WCT returns, normally the wct certificate issued to contractors are also seeked at the hard copy. This can be dispensed away.

5) Comprehensive DVAT System – Need of the day

It is crucial the dvat systems evolves into a system which is transparent and user friendly at the same time. Department has done commendable efforts to improve its systems. As a part of further evolving process, the system can be made to :-

• Generate TIN based linked invoices
• Automate Returns (subject to manual adjustments, if any) based on generated and punched invoices and credit notes
• Email Notifications for mismatches based on 2A-2B.
• Maintenance of all statutory registers on the portal itself. This would allow real time access to the information to both the dealer / officials, which in turn can reduce departmental interventions in routine course of dealer.

6) Registration

The registration processes have been simplified to a great extent by the department. Further, the process can be streamlined further on following aspects:-

• Randomization of inspection officials.
• Closure of RC Issuance or notice for cancellation within 48 Hours (for example)
• To ensure more smooth registration, the TIN shall be provided along with RC only. The time gap between TIN number issuance and RC issuances may result in several transactions in the intervening period which have its effects.

7) Amendment in Registration

This can be further simplified. Currently, the complete DP-1 / DVAT-07 has to be filed for amendment. As a process, the amendments can be identified in different categories viz, change in name, constitution, contact details, items etc. If only that amended portion is seeked and filed online, it can radically reduce the time frame and hassles.

8) Ward Change – Based on Address Change

In my view, this requires thought process at the strategical level. In an ideal sense, where the address has changed and ward jurisdiction shall change accordingly or not cannot be a blanket decision. In normal cases and subject to outgoing jurisdictional VATO confirmation it can be allowed straight away.

B) Legal Changes

9) Very Heavy Late Return filing fees

It is noteworthy that per day of delay in filing a return attracts a late fees of Rs 500/- day in Delhi. If you are registered in both VAT / CST then late fees would be Rs 1,000/- per day (VAT & CST Return are separate returns). This quantum of per day late fees can be re-considered in light of many dealers including small retailers filing very low tax returns or even nil returns.

10) Works Contract Composition Scheme

· Composition scheme currently is sub-distributed based on category of works contracts and modalities of operation choosed by the dealer into three parts and two sub-schemes.

· Further, a specific clause or clarification can be issued on applicability of scheme in case of non monetary consideration agreements of works contract like in case of area sharing agreements.

11) Flat rate of tax i.e. 12.5% in works contract can be revisited

In Delhi, if the material is sold pursuant to the works contract then the rate of tax shall be always 12.5% unless in case of printing contracts or declared goods. Such a provision can be relooked and the items shall be made taxable as per their listing in the schedules to DVAT Act to bring parity between tax cost of normal sales and deemed sales of works contract.

Similar provisions of taxing the items as per schedule rates even if transferred pursuant to works contract exists in states like Haryana & Uttar Pradesh as well.

12) Rule 3 of DVAT Rules

As per proviso to Rule 3(2),

“PROVIDED that where amount of charges towards labour, services and other like charges are not ascertainable from the books of accounts of the dealer, the amount of such charges shall be calculated at the percentages specified in the following table”

The above provision instead of being a second resort to department (where the books of accounts cannot be utilized for computation of labour and service charges) can be made optional at dealer’s end. This can reduce litigation largely and provide certainty to works contract valuation.

13) Limitation period for filing objection against mismatch assessments

The Section 74 of the Act provides a deadline of 2 months from the date of service of notice and further condonation of delay of 2 months. In cases of mismatch assessments being newly implemented and required immense external documentation since demand / objection of purchasing dealer will depend on documents / returns / invoices and challans of selling dealer is always a time consuming effort.

In view of the above, the mismatch assessments objections can be separately dealt with in the Act, may be vide a proviso insertion to this effect.

14) Input tax credit hindrance

The biggest problem the dealers are facing today is undoubtedly the 2A-2B mismatches. As per section 9, the input tax credit can be denied to the purchasing dealer if:-

“ to the dealers or class of dealers unless the tax paid by the purchasing dealer has actually been deposited by the selling dealer with the Government or has been lawfully adjusted against output tax liability and correctly reflected in the return filed for the respective tax period”

This provision requires a revisit in all means. Where the purchasing dealer in all bonafide intention has paid his tax to the selling dealer and selling dealer has then not discharged his obligations of tax payments and return filing, the purchasing dealer shall be not be denied the input tax credit. The tax shall be recovered from the selling dealer only.

Traders cannot be expected to obtain return copies of each and every vendor they transact with.

15) Composition scheme for retailers

The threshold limit of composition dealer can be revisited and if required further increased. A suitable rate and threshold turnover for eligibility would prompt more tax compliance from small retail dealers much to the benefit of economics and sentiments.

16) Audits & Search – Seizure related matters

For audits and search / seizure / survey matters, it is essential to note that these matters are to play a balancing roles between avoiding harassment to tax paying dealers and making tax evading dealers to comply the law of the state. Though no blanket provisions can be introduced to this effect, audits can be exempted to a suitable threshold gross turnover and it is can made once in three / five years for certain class of dealers.

Before parting…

The Delhi VAT department has evolved in very significant manner over a period of time. Further evolving is always the desired route for both state government and Delhi dealers. The above can be few areas among many where the processes and rules require a revisit and the interest in large of dealers and revenue both needs a equivalent safeguard.

I intend to receive constructive comments and views of esteemed readership.

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About the Author:

CA Ankit Gulgulia (Jain)

Author is Practicing Chartered Accountant in New Delhi/NCR and his area of interest includes Indirect Taxes, Corporate Laws and Transfer Pricing. He can be reached at ankitgulgulia@gmail.com.

DISCLAIMER: This article is provided purely for your information only and you should check other information sources before taking any action based on any of the content in this article. Neither the authors nor website hosting the article make any warranty as to the quality or currency of the information contained in any of the site's articles.

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VAT Problems In E-Commerce Transactions – Amazon’s Karnataka Case Study (A Potential Noscitur Principle Issue)

VAT Problems In E-Commerce Transactions – Amazon’s Karnataka Case Study (A Potential Noscitur Principle Issue)

E-commerce transactions in India are gaining popularity at the very fast pace majorly due to its attributes of ease of shopping, good discounts, social media integration, cash on delivery mode of payment etc. The Industry is all set to grow and beat the records considering the recent show of strength of several E-commerce companies of India Inc in there capability to raise funds as well.

The fact that the domain of e-commerce is so new and upbeat there may be several laws that were essentially made to govern the conventional sales and purchase system which are required to made upbeat or atleast clarified by revenue authorities / judiciary to ensure that this richly growing industry is certain in terms of taxation.

One such case of tax hurdle has recently cropped in case of Amazon in Karnataka. Before we proceed with the legal discussion, the facts are important.

E-Commerce Transactions – Types

E-commerce transactions in India can be of several natures. Two well known are as under,

   A)     It may be a case where an E-com Company may buy the products in bulk in discount and then sell the same at cheaper price by the help of its online e-commerce platforms.  Though this is not a general model considering the cost and working capital pressure that may be involved.

   B)      The other method which is more popular and frequently adopted method is to act as platform facilitator between the sellers and the buyers. In this model, E-com company does not purchases the inventory but instead asks the third party sellers to sell by using its platform to the customers who log on the E-com company’s platform. Importantly, the e-com company charges commission / delivery charges and undertakes to perform packing and marketing / delivery of the goods to the customer. Obviously, the invoices are made at the end of independent sellers directly to the customers.

KEY NOTE :- Crucially, in order to ensure quick availability of products with E-commerce company these sellers are required to amend their registration to include the space/premise with E-com Company as “Additional place of business (if already registered with main office”) based on rent / lease/ Service agreement entered into between the sellers and E-commerce Company. In Delhi it is undertaken by amendment filed with DVAT department in DVAT – 07.

From this premise of E-com Company then all the goods are gathered, processed / packed and sent for delivery to the customers either independently or vide dedicated courier agencies.

Issue

As reported by several leading business times, it is learnt that the issue mainly arisen in case of e-commerce companies that undertake storage of goods procured from various sellers in their warehouse before dispatching them to the respective buyers. It appears that Karnataka VAT authorities are of the view that in such cases, the e-commerce companies are involved in supplying and distribution of goods and, therefore, would qualify as ‘dealers’.. The authorities are also of the view that these companies act as commission agents or consignment agents of sellers. Therefore, these companies are covered under the definition of ‘dealers’ and, therefore, are liable to discharge VAT.

The term dealer is defined under Section 2(12) of the Karnataka Value Added Tax Act, 2005 as under (relevant portions only):
            'Dealer' means any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash or for deferred payment, or for commission, remuneration or other valuable consideration, and includes-
(c) a commission agent, a broker or del credere agent or an auctioneer or any other mercantile agent by whatever name called, who carries on the business of buying, selling , supplying or distributing goods on behalf of any principal;
Key Note :- Similar provisions may exist in most of the states in regard to the definition of dealer and this fact can raise serious concerns in regard to taxability in all states on ecommerce industry if the matter is not expeditiously addressed by the revenue authorities. In Delhi (unlike Haryana) incidentally, section 2(1)(j), do not refer to supplying, or distributing in the main part of the definition though portion relating to commission agent is similar even in delhi.

Further, the authorities in Karnataka are insisting that e-commerce companies register their premises / warehouse and undertake other compliances like maintenance of statutory records and filing of returns.

“The tax authorities do have a point when they question how so many vendors have registered the Amazon warehouse as an additional place of business; even if there is no rule capping the number of vendors that can declare a particular place as an additional place of business, the spirit of the law would suggest that such a registration be backed by some staff, infrastructure and so on.” – Financial Express   

Legal Discussion

Four Key Points,

    a)        It is learnt that in the current matter, advance ruling dated August 24, 2012 in case of Amazon Seller Services was obtained wherein the Authority held that Amazon is providing an online retail distribution channel and the associated logistical services. Thus, it was held that Amazon is clearly a service provider.

    b)      Karnataka VAT authorities may need to consider that without even first going in the aspect of who is dealer and who is not, it is essential that the incidence and taxable event must exist to tax such a transaction. Taxable event is sale / purchase. 

    c)       Thirdly, the whole issue gains force on the assumption / hypothesis that E-commerce Company acts as ‘Agent’. the e-commerce companies provide services on principle to principle basis to the sellers and not as agents of the sellers. As per Section 182 of the Indian Contract Act an agent means “a person employed to do any act for another or to represent another in dealings with third persons”.   Clearly, in the present case e-commerce companies are not engaged in sale of goods on behalf of the principals. They only provide a portal which enables the buyer to meet the sellers and thereafter provide logistic services to the sellers to ensure that the goods are delivered to the buyer.

   d)      Noscitur Principle:- Despite this it is crucial to understand that the Karnataka VAT Authorities may push to consider the E-commerce Companies therein as dealers without the definition of agent since the dealer itself covers the activity of supplying / distributing the goods for any valuable consideration. 

But the Karnataka VAT authorities may have overlooked is the Noscitur Principle which has used in catena of judgements to identify the harmonious law applicable to the transaction.

In above the case, the word ‘supply’ and ‘distributing’ should be interpreted in light of ‘Noscitur a Socii”. Several case laws might be resorted by the E-commerce companies,

a)       CIT Bangalore v. BC Srinivasa Shetty 1981 (2) SCC 460

b)       M/s Bhayana Builders (P) Ltd. & Others Versus CST, Delhi & Others 2013 (32) S.T.R. 49 (Tri. - LB) etc

Nonetheless, it seems that the issue might be stretched on the aspect of interpretation specially in those states where the definition of dealer itself covers supply and distribution in the main portion of definition irrespective of agency.

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About the Author:

CA Ankit Gulgulia (Jain)

Author is Practicing Chartered Accountant in New Delhi/NCR and specialising in Indirect Taxes, Corporate Laws and Transfer Pricing. He can be reached at ankitgulgulia@gmail.com or at +91-9811653975

DISCLAIMER: This article is provided purely for your information only and you should check other information sources before taking any action based on any of the content in this article. Neither the authors nor website hosting the article make any warranty as to the quality or currency of the information contained in any of the site's articles.

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