A. NO TAX ON OVERSEAS OPERATIONS

B. INDIRECT INPUTS TOO ARE ELIGIBLE FOR TAX CONCESSIONS

C. INTEREST ON BORROWED FUNDS TRANSFERRED TO SUBSIDIARY TAXABLE

D. ROLE OF PERSON CHARGED IMPORTANT FOR LIABILITY UNDER SECTION 138 OF NIA

E. RELIEF GRANTED TO EXPORTER & FINE IMPOSED ON GOVERNMENT

F. APEX COURT STAYS SAT ORDER IN DLF CASE

G. NOTICE IN MORGAN STANLEY CASE RAISES THE SPECTRE OF UNCERTAINITY

H. ASSESSING OFFICER HAS NO POWER TO ENTERTAIN CLAIMS DURING ASSESSMENT

I. INTEREST ON INTEREST PAYABLE IF INTEREST PAYMENT DELAYED

J. SALES TAX CANNOT BE IMPOSED ON SALE OF LOTTERY TICKETS

K. DECISION ON SALES TAX LIABILITY OF MOBILE PHONE CONNECTIONS

L. COMPENSATORY TAX CANNOT BE LEVIED ARBITRARILY

The Apex Court has ruled that offshore services rendered by a foreign company are not the same as services rendered by its permanent establishment in India for tax purposes. The apex court said the Authority for Advanced Ruling (AAR) had erred in imposing tax on income arising from the supply of offshore equipment and services by foreign companies.
Setting aside an order of AAR , the apex court said, “In our opinion, the authority has committed an error, as if services rendered by the head office are considered to be services rendered by the PE, the distinction between Indian and foreign operations and the apportionment of the income of the operations shall stand obliterated”. The tax authority had said that for the income arising from supply of offshore equipment and services, a foreign company was liable to pay tax in India .

Overruling the order, the apex court said two issues deserved to be properly construed. First, the taxation of the price of offshore equipment. Second, the tax on the income from offshore services. The court gave a big relief to foreign companies by not allowing the authority to levy taxes on both. The court did not agree with the AAR that offshore services are liable for taxation as it is intimately connected with the project here. “In our opinion, the concept of profits from business connection and PE should not be mixed up. Whereas business connection is relevant for the purpose of application of Section 9 of I-T Act, the concept of PE is relevant for assessing income of a non-resident under Double Taxation Avoidance Agreement,” the Apex Court said.

The ruling came on an appeal by Japanese MNC Ishikawajima-Harima Heavy Industries, which had formed a consortium with five others and entered into an agreement with Petronet LNG to set up a LNG receiving, storage and degassification facility at Dahej in Gujarat . The court, zeroing in on the contract’s nature, said it could not be treated as an integrated one so as to tax the company. “By entering into a contract in India , although parts thereof will have to be carried outside India , would not make the entire income derived by contractor to be taxable,” it noted.

Source: Times of India

The Apex Court has ruled that the sales-tax exemption can be availed on raw materials eligible for tax concessions even if they are used indirectly in manufacturing the final product. The government cannot levy sales tax on items under the plea that they were intermediates and not directly used for manufacturing the final product, the apex court said while dismissing an appeal of Udaipur ’s commercial taxation officer.

The case pertains to diesel used for generation of power consumed to manufacture polyester yarn. The appeal had argued that diesel was not a raw material for polyester yarn. Disagreeing with the contention, the Apex Court said, “It is seen that as diesel is specifically and intentionally included in the definition of raw material by the legislature, the question that whether it is directly or indirectly used in the process of manufacture is irrelevant.”
The court said it is not in dispute that the company is a manufacturer of synthetic blended yarn for which it purchased diesel in accordance with the provisions of Rajasthan Sales Tax Act, 1994. As notified by the government, it is eligible for such tax sop, said the court.

Rajasthan Taxchem, the company in question, is engaged in the business of manufacturing polyester yarn. The company purchased diesel and used it for generating power using DG sets. Therefore, it claimed benefit under Section 10(1) of Rajasthan Sales Tax Act, 1994, claiming that diesel purchased is a raw material for the manufacture of polyester yarn.

However, the assessing authority held that since diesel was not directly used for the manufacture of final product, the company was not entitled to the benefit of tax concession. Accordingly, it levied the tax on diesel against which the company approached the deputy commissioner (appeal) which had dismissed the appeal. Not satisfied, the company then moved the Rajasthan Tax Board which quashed the tax demand order. The state then moved the Rajasthan High Court which dismissed the appeal. The case finally reached the Supreme Court which has ruled in favour of the company.

Source: Economic Times

In a far-reaching judgement on intra-corporate advances, the Supreme Court has held that tax cannot be levied on a corporate if it transfers borrowed money to its subsidiary or any other entity, if the transaction is driven by commercial reasons.

The Supreme Court was deciding on the issue of whether interest on borrowed fund can be deducted in the computation of taxable income, even if the borrowed fund is transferred to a subsidiary company. The apex court held that the only factor the income tax department should consider is that if borrowing and advancing to a sister company is driven by commercial expediency. If the transaction is driven by objectives other than commercial, such deals cannot claim exemption from tax.

The Supreme Court added that if the directors of the sister concern utilise the money advanced to it for their personal benefit, it cannot be said such money has been given for commercial purpose. The Apex Court said that “We wish to make it clear that it is not in our opinion that in every case, interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the case,”

This court’s judgement was related to a case involving SA Builders. This company had transferred Rs 8.2 million to its subsidiary company SAB Credit, out of the cash credit account in which there is a huge debit balance. It was an interest-free loan to the subsidiary. The I-T department did not take the interest-free loan theory for granted. The department’s opinion was that interest should have been claimed from the subsidiary by SA Builders.
It, therefore, disallowed deduction of over Rs 0.5 million as interest that should have been claimed from the subsidiary, while computing the expenditure by way of interest paid to the bank by SA Builders.

The Supreme Court held: “It is true that borrowed amount in question was not utilised by the assessee in its own business but had been advanced as interest-free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency.”

The apex court disagreed with contrary views taken by other appellate forums, including a Bombay High Court decision in Phaltan Sugar Works Vs Commissioner of Wealth Tax (1994) in which it was held that deduction under Section 36 (1) (iii) can only be allowed on the interest if the assessee borrows capital for its own business.

Source: Times of India

The Apex Court has ruled that a person cannot be prosecuted merely because he or she is the director of the company involved in litigation. The liability depends on the role one plays in the affairs of a company and not on the designation or status of the person charged while upholding an appeal filed in a case related to a bounced cheque.

One of the directors of VHEL Industries, had challenged the Delhi High Court’s decision making him liable for prosecution despite his having resigned from the company. He had said that the cheque was signed by two other employees but he was being implicated in the matter on account of having been a director of the firm when the cheque was issued. The high court, while rejecting his argument, had reasoned that the director was liable for prosecution as the post-dated cheque was issued on May 10, 1997 , whereas he resigned from the company only on June 19, 1997 .

As per the provisions of the Negotiable Instruments Act, “A person committing an offence under Section 138 is a company, every person, who at the time the offence was committed, was in charge of, and was responsible to, the company for conduct of business of the company, shall be deemed to be guilty of the offence.”

The apex court, however, observed that the complainant had failed to prove as to the manner in which the appellant director was responsible for the conduct of the firm’s business.  The bench pointed out that the appellant director had not issued the cheque and the complainant failed to prove that he was responsible for the cheque being dishonoured. Interpreting Section 138 of the Act, the court said that to make a director of a company liable for an offence, it was obligatory on the complainant’s part to make specific allegations. The apex court said that liability depends on the role one plays in the affairs of a firm and not on the designation or status of a person.

SourceL Economic Times

In a relief to the exporters, the Supreme Court has ruled that consignments cleared by Customs officials cannot be subsequently held back from exports due to policy decisions. The Supreme Court has held that “As soon as the permission is granted by the officer, procedures laid down for export must be held to have been complied with” The case relates to export of pulses at the Kandla port and the government ban on export of the commodity. While dismissing an appeal of the Centre, the Apex court also imposed an exemplary fine and counsel’s fee of Rs 1 lakh on the government for denying export permission for export consignments which was already cleared by the concerned officials.

The petitioner, Asian Food Industries, had entered into an agreement with the Overseas Importers, a trading firm based in Middle East , for supply of pulses. The contract was executed between April 22 and May 2, 2006 . Shipment of 20 containers took place between June 22 and June 24.

The remaining 87 containers were cleared and let export orders dated June 23, 24 and 26 were issued by the custom authorities at Kandla Port. The bills of landing were also issued.

In the meanwhile, a decision was taken by the central government to ban the export of pulses on June 22. It was widely reported in media but the notification to that effect was issued on June 27. On June 28, the superintendent of Customs, dealing with the transaction, directed the Kandla Port Trust not to allow further consignments for shipment. The assistant traffic manager then informed that even if goods have been cleared by the issuance of let export orders, the same cannot be loaded on the shipping vessels in view of the said prohibition.

Challenging that, the exporter approached the Gujarat High Court which had ruled that they were entitled to export the goods despite June 27 notification, banning such export. The government then moved the apex court which has also ruled in favour of the exporter.

Source: Economic Times

The Supreme Court (the Apex Court) has stayed a Securities Appellate Tribunal (SAT) order, passed in May 2006, granting relief to the promoters of Bhoruka Financial Services (BFSL) in the sale of shares to DLF group company DLF Commercial Developers. This order has given a boost to the Securities and Exchange Board of India (SEBI), which is investigating alleged irregularities in the sale.

DLF Commercial Developers (DLF) had entered into a share purchase agreement with the promoters of BFSL in July 2005 to buy out their 98.73% stake. The remaining 1.27% stake representing 2,550 shares were held by 26 public shareholders. DLF had filed an application with SEBI seeking an exemption from making an open offer to the public shareholders, which was granted. BFSL shares were listed on the Bangalore Stock Exchange. However, DLF purchased the shares from the promoters of BFSL through transactions on the Magadh SE.

In an ex-parte interim order passed on August 19, 2005 , SEBI barred DLF from dealing in the scrip of BFSL. The promoters of BFSL were directed to deposit the proceeds of the sale in an escrow account with a nationalised bank. The SEBI order said that “DLF acquired 98.73% of the shares of BFSL from the promoters by executing the transactions not on Bangalore Stock Exchange, on which the shares were listed, but on Magadh Stock Exchange (MSEA), where the shares were not listed but were hurriedly allowed to be traded in permitted category using the services of a broker of MSEA.” SEBI said the transactions were in violation of the by-laws of the exchange and, hence, termed them illegal. The SEBI order further noted that “The concatenation of events when seen together suggested deviousness in the whole set of transactions and led to the prima facie conclusion that the acquirer DLF and the sellers/promoters consciously and with pre-meditated design chose to execute the trades on MSEA, with a view to avoiding regulatory attention and scrutiny.”

Source: Economic Times

The Authority for Advance Ruling (AAR) had held in the case of the US based investment bank, Morgan Stanley Advisory Services (MSAS) that its captive BPO in India does not constitute a permanent establishment (PE). The AAR had also held that MSAS is not a fixed place business of Morgan Stanley and it does not have the authority to conclude contracts. Morgan Stanley will, therefore, not be liable to pay tax on a portion of its global profits if it pays the arm’s length price to its Indian subsidiary.

The income-tax department has filed a special leave petition in the SC contesting some of the grounds of the AAR ruling. Morgan Stanley will file a cross-objection to the notice given by the SC on the SLP. Such a notice is the first step before the SC takes a call on whether or not to admit the petition. If the SC admits the case, it could have wide-ranging implications on the tax liability of several foreign companies outsourcing their back-office functions to Indian companies. Keeping in mind the spirit of advance rulings to grant certainty to foreign investors as to their tax consequences, it is expected that the SC would be hearing this matter on an expedited basis.

The rulings of the AAR , which is a quasi judicial authority, are binding on both the tax payer and the income-tax department. Therefore, a pertinent question arises as to the finality of various rulings of the AAR since if the SC admits appeal against such rulings, it would open Pandora’s Box. In such an event, the entire sanctity of the scheme of Advance Rulings would definitely get eroded and uncertainty would prevail since no certainty would be attached to any rulings of the AAR .

The Supreme Court (SC) in its recent judgment in case of Goetze ( India ) Ltd v CIT has held that the assessing officer has no power to entertain a claim made otherwise than by filing a revised return of income.

Facts of the case were that the assessee filed its return of income on November 30, 1995 for assessment year 1995-96, and on January 12, 1998 the assessee claimed a deduction by way of a letter addressed to the assessing officer. The assessing officer did not allow it on the ground that there was no provision in the Income-Tax Act, 1961 (the Act) to make an amendment in the return of income at the assessment stage without revising the return of income. The decision was confirmed by the appellate tribunal as well as the high court. The question that was raised before the Supreme Court was whether the assessee could make a claim for deduction during the assessment proceedings without filing a revised return.

The assessee relied upon the judgment of the Supreme Court in the case of National Thermal Power Company Ltd v CIT (1998) 229 ITR 383 (SC).The issue in the said case was whether the appellate tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee. This question was answered in affirmative by the Supreme Court. The Supreme Court, however, observed that the judgment in NTPC's case relates to the power of appellate tribunal and the decision does not in any way relate to the power of the assessing officer. The Supreme Court dismissed the civil appeal with the remark that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the appellate tribunal under section 254 of the Act.

It may be pertinent to note that the judgment in Goetze's case did not take cognizance of the judicial view that the assessee is entitled to make any claim of deduction in the course of assessment proceedings. Also, there is no discussion regarding the difference between revision of return and modification (correction) of return. Before the judgment in Goetze's case, the difference between the two was fairly well understood and recognised. The Allahabad High Court in case of Dhampur Sugar Mills v CIT (1972) 90 ITR 236 (All) had clarified that if an assessee files an application for modifying or correcting a return filed, it would not mean that he has filed a revised return. The original return filed by him will retain the character as original return, but subject to modifications requested by the assessee. But once a revised return is filed, the original return must be taken to have been withdrawn and to have been substituted by a fresh return for the purpose of the assessment.

The judgment uproots the settled practice and is contrary to the view expressed by the Central Board of Direct Taxes (CBDT) vide Circular No 14 (XL-35) dated April 11, 1955, that the assessing officers should not take advantage of the ignorance of the assessees regarding their rights and draw their attention to any relief to which they are entitled and guide the assesses in making correct claim. One wonders how this will be possible if the assessing officers are now not allowed to entertain a claim of the assessee at the stage of assessment proceedings.

Source: The Financial Express

In a landmark decision which is bound to have a significant impact on the way the Income Tax Department treats payment of interest on refund, the Apex Court (the Supreme Court), in the case of Sandvik Asia Ltd. (the Petitioner) V. CIT & Ors. (2006) 280 ITR 643 (SC), has ruled that the Income Tax Department is bound to pay interest on interest if there is delay on the payment of interest on the refund amount.

Facts of the case:

For the A.Y. 1978-79, the petitioner paid advance tax of Rs.11,181,844. By the assessment order dated March 2, 1981 , the petitioners’ income for the said period was assessed at Rs.15,417,090 and the tax liability was determined at Rs.8,903,368. The excess advance tax of Rs.2,278,476 was refunded. In appeal, by order dated August 23, 1985 , the income of petitioner was reduced to Rs.9,393,108 and the tax liability was determined at Rs.5,424,561. Accordingly, further refund of Rs.3,478,807 was granted on April 30, 1986 . As against the petitioners’ claim of interest to the tune of Rs.4.258,766, it was allowed only to the extent of Rs.173,940 on November 29, 1986 , and the claim for the balance amount was rejected. The revision filed by the petitioner was rejected on February 28, 1990 .

However, the Supreme Court by its order dated April 30, 1997, directed the Commissioner of Income-tax, Pune to consider the revision petition in the light of the Supreme Court’s decision in Modi Industries Ltd. v. CIT, (1995) 216 ITR 759. By order dated September 29, 1997, the Commissioner of Income-tax-(1), Pune, directed the payment of interest according to the decision in Modi Industries’ case (1995) 216 ITR 759 (SC) and accordingly, the Joint Commissioner of Income-tax, SR-II, Pune by his order dated March 27, 1998, while giving effect to the order of the Commissioner of Income-tax, dated September 29, 1997, granted interest amount to the tune of Rs.4,084,906 in addition to Rs.173,940 which was paid on November 29, 1986, thereby totalling the interest amount to Rs.4,258,846. The said interest amount was paid on March 27, 1998 .

After receipt of the said interest amount, the petitioner preferred an application contending that due to delay in payment of the amount of interest, the petitioner was entitled to claim further interest on the said amount of interest. The claim of the petitioner was rejected by the impugned order dated September 25, 2000 . The petitioner filed a writ petition seeking interest on the delay in payment of interest. Similar petitions were filed for the A.Ys. 1977-78, 1981-82 and 1982-1983. The Bombay High Court (267 ITR 78) dismissed the petitions of the petitioner holding that there was no provision in the Act for the payment of interest on interest, and the interest could not be granted also on equitable grounds.

Decision:

On appeal to the Supreme Court, it held that there is no provision in the Act for the payment of compensation, but compensation for the delay is required to be paid in view of its decision in Narendra Doshi’s case (2002) 254 ITR 606. The Supreme Court further held that the Act recognises the principle that a person should only be taxed in accordance with law, and hence, where excess amounts of tax are collected from an assessee or any amounts are wrongfully withheld from an assessee without authority of law, the Revenue must compensate the assessee. The Supreme Court was of the opinion that the petitioner was entitled to interest even u/s.244/244A of the Act. The Supreme Court held that the facts clearly showed that the petitioner was undisputably entitled to interest u/s.214 and u/s.244 of the Act as held by the various High Courts and also by it. The petitioner’s money had been unjustifiably withheld by the Department for 17 years without any rhyme or reason. The interest was paid only at the instance and intervention of the Supreme Court. Interest on the delayed payment of refund was not paid to the petitioner on 27-3-1981 and 30-4-1986 due to erroneous view taken by the Department. Interest on refund was granted to the petitioner after substantial lapse of time, and hence, it was entitled to compensation for this period of delay.

The Supreme Court held that the High Court had failed to appreciate that while charging interest on the assessees, the Department first adjusts the amount paid towards interest, so that the principal amount of tax payable remains outstanding and they are entitled to charge interest till the entire outstanding is paid. But when it comes to granting of interest on refund on taxes, the refunds are first adjusted towards the taxes and then the balance towards interest. Hence, as per the stand that the Department takes, they are liable to pay interest only up to the date of refund of tax, while they take the benefit of the assesses, funds by delaying the payment of refund without incurring any further liability to pay interest. This stand taken by the Department is discriminatory in nature and thereby causes great prejudice to the assessee. The Supreme Court directed the payment of simple interest at 9% per annum from the date it became due till it was actually paid, within one month of its order, failing which, the Department was liable to pay penal interest at 15% per annum.

The Supreme Court (SC) has held that the state governments cannot levy tax on the sale of lottery tickets. A five-judge Constitution Bench, headed by Justice Ruma Pal, overruling a 1986 judgment of the apex Court, said that sale of lottery tickets cannot be equated with sale of goods and hence tax cannot be imposed. Delivering the judgment on a bunch of petitions challenging the levy of sales tax on lottery tickets, the Bench said that its order would be effective prospectively from the date of its judgment.

The SC in 1986 had held in H.Anraj Vs. Government of Tamil Nadu that tax could be levied on sale of lottery tickets. This judgment was based on the premise that a lottery ticket essentially involved transfer of two rights viz., the Right to participate in the lottery draw and the Right to win the prize depending on chance. It held that while the right to win the prize was an actionable claim and hence not ‘goods” for the purposes of Sales Tax, the right to participate was held not to be an actionable claim and hence liable to sales tax.

A five-judge Constitution Bench of the SC in Sunrise Associates Vs. Government of NCT of Delhi & Others has overruled the above decision by holding that sale of lottery is essentially a sale of a “chance to win” and distinction between chance to win and right to participate is unwarranted since neither of the rights can stand without the other as they are inseparable. SC also observed that a ticket being a physical article may not necessarily be a “good”. The lottery ticket is essentially an evidence of a contract and in some cases (like a railway ticket or a cinema ticket), the contract between the vendor and buyer of the ticket. Its true character and hence its taxability would depend on what it represents.

1. What are "goods" in telecommunication for the purposes of Article 366 (29A)(d)?
2. Is there any transfer of any right to use any goods by providing access or telephone connection by the telephone service provider to a subscriber?
3. Is the nature of the transaction involved in providing telephone connection a composite contract of service and sale? If so, is it possible for the States to tax the sale element?
4. If the providing of a telephone connection involves sale is such sale an inter-state one?
5. Would the "aspect theory" be applicable to the transaction enabling the States to levy sales tax on the same transaction in respect of which the Union Government levies service tax.

1. The Apex Court held that electromagnetic waves are neither abstracted nor are they consumed in the sense that they are not extinguished by their user. They are not delivered, stored or possessed. Nor are they marketable. They are merely the medium of communication. What is transmitted is not an electromagnetic wave but the signal through such means. The signals are generated by the subscribers themselves. In telecommunication what is transmitted is the message by means of the telegraph. No part of the telegraph itself is transferable or deliverable to the subscribers. In view of the foregoing, the Apex Court held that the electromagnetic waves are not 'goods' within the meaning of the word either in Art. 366(12) or in the State Legislations. The Apex Court also clarified that licences granted under the Indian Telegraph Act clearly manifest that they were for providing telecommunication services and not for supplying any goods or transfer of right to use any goods. The Apex Court also held that in the circumstances, it is not necessary for it to determine whether the telephone system including the telephone exchange was not goods but immoveable property as contended by some of the petitioners. However, it pointed out that the handsets supplied by the service provider would come within the ambit of the definition of the word “goods”. Thus it held that provision of telephone service is nothing but a service and there is no element of sale involved in the said transaction except the sale of handsets and any other accessories supplied by the service provider. The Apex Court held that what a SIM card represents is ultimately a question of fact as has been correctly submitted by the States. Thus, as far as the SIM cards are concerned, the Apex Court left the issue for determination by the Assessing Authorities. The Apex Court however pointed out that in determining the issue, the Assessing Authorities will have to keep in mind the following principles: If the SIM Card is not sold by the assessee to the subscribers but is merely part of the services rendered by the service providers, then a SIM card cannot be charged separately to sales tax. It would depend ultimately upon the intention of the parties. If the parties intended that the SIM card would be a separate object of sale, it would be open to the Sales Tax Authorities to levy sales tax thereon. There is insufficient material on the basis of which we can reach a decision. However the Apex Court emphasized that if the sale of a SIM card is merely incidental to the service being provided and only facilitates the identification of the subscribers, their credit and other details, it would not be assessable to sales tax. . The Apex Court pointed out that the Kerala High Court also dealt with the case of BPL, a service provider. According to BPL, it did not sell cellular telephones. As far as SIM cards were concerned, it was submitted that they had no sale value. A SIM card merely represented a means of the access and identified the subscribers. This was part of the service of a telephone connection. The Kerala High Court rejected this submission finding that the SIM card was "goods" within the definition of the word in the State Sales Tax Act and the Apex Court expressed its opinion that the High Court ought not to have finally determined the issue.
2. The Apex Court opined that the essence of the right under Article 366 (29A) (d) is that it relates to user of goods. It may be that the actual delivery of the goods is not necessary for effecting the transfer of the right to use the goods but the goods must be available at the time of transfer must be deliverable and delivered at some stage. It is assumed, at the time of execution of any agreement to transfer the right to use, that the goods are available and deliverable. If the goods, or what is claimed to be goods by the respondents, are not deliverable at all by the service providers to the subscribers, the question of the right to use those goods, would not arise. But if there are no deliverable goods in existence as in this case, there is no transfer of user at all. Providing access or telephone connection does not put the subscriber in possession of the electromagnetic waves any more than a toll collector puts a road or bridge into the possession of the toll payer by lifting a toll gate. The Apex Court pointed out that the toll payer will use the road or bridge in one sense. But the distinction with a sale of goods is that the user would be of the thing or goods delivered. The delivery may not be simultaneous with the transfer of the right to use. But the goods must be in existence and deliverable when the right is sought to be transferred. Therefore whether goods are incorporeal or corporeal, tangible or intangible, they must be deliverable. To the extent that the decision in State of U.P. Vs. Union of India held otherwise was held to be erroneous.
3. The Apex Court pointed out that no one can deny the legislative competence of States to levy sales tax on sales provided that the necessary concomitants of a sale are present in the transaction and the sale is distinctly discernible in the transaction. This does not however allow State to entrench upon the Union list and tax services by including the cost of such service in the value of the goods. Even in those composite contracts which are by legal fiction deemed to be divisible under Art. 366(29A), the value of the goods involved in the execution of the whole transaction cannot be assessed to Sales Tax. Thus the Apex Court held that the nature of the transaction involved in providing the telephone connection may be a composite contract of service and sale. It is possible for the State to tax the sale element provided there is a discernible sale and only to the extent relatable to such sale.
4. The issue of whether sale, if involved in providing of a telephone connection, is an inter-state one or not was left unanswered by the Apex Court.
5. The Apex Court held that the aspect theory would not apply to enable the value of the services to be included in the sale of goods or the price of goods in the value of the service.

The Supreme Court has held that state governments cannot levy compensatory tax on any company without providing facilities commensurate to the amount charged. A five-judge bench headed by Justice Ruma Pal noted that if there was no “direct or immediate” benefit to the company, such a levy would amount to restriction on trade and commerce prohibited under Article 301 of the Constitution. The court, thereby, overruled an earlier judgment in the Bhagatram case holding that even if there was “some connection” between the tax and the facilities provided by the state, the levy would not be unconstitutional.

A compensatory tax is a reimbursement sought by states for the costs incurred for providing services to the company operating from the state, the court said. Unlike tax, there has to be a “quantifiable and measurable benefit” from a fee or compensatory tax, the court pointed out. The court noted that Article 301 barred states from putting any restriction on free trade and commerce and taxing laws were no exception. To facilitate free and unrestricted trade throughout the country, the constitution does not allow states to levy sales tax on inter-state sales. Only Parliament has the power to impose restrictions in public interest. The bench quoted with approval the ruling in the Atiabari Tea Company case in which it was held that even tax laws could amount to restriction on trade and commerce.

Later, in the Automobile Transport case, the concept of compensatory tax was framed to allow states to get back money spent on providing facilities like roads. But the concept was widened in the Bhagatram case which abandoned the “direct benefit” theory and said even some link between the tax and the facilities was sufficient to justify the levy.

Source: The Telegraph