TAXABILITY OF INTANGIBLE GOODS. REP Licences, Exim Scrips, Copy Rights, Patents, Goodwill, Trademarks, Royalty and DEPB

Transcription

1 1 TAXABILITY OF INTANGIBLE GOODS REP Licences, Exim Scrips, Copy Rights, Patents, Goodwill, Trademarks, Royalty and DEPB REP Licences, Exim Scrips, Copy Rights, Patents, Goodwill, Trademarks, Royalty and DEPB are the words attached with modern trade systems. They are part of developed economies and matured trade systems. These have a great value and are transferable for a valuable consideration. In the liberalized economy and in the time of mergers and acquisitions, these words have suddenly shot to significance in view of the valuable consideration involved and also in view of lesser availability of detailed legislative law on the subject. Intangible properties are treated as goods and are subjected to Sales Tax. What are these intangible goods? When does property in them passes from the seller to the buyer? What is the situs of sale in these cases of sale? On what basis their sales be treated as inter-state sales? Position under the U.P.Trade Tax Act 1948 Section 2(d) Goods means every kind or class of movable property and includes all.. but does not include actionable claims, stocks, shares, securities or postal stationery sold by the Postal Department. Position under the Haryana Value Added Tax Act, 2003 : The definition of the term goods means every kind of movable property, tangible or intangible,. Schedule C at entry No. 38 provides Incorporeal or intangible goods taxable at 4%. What are these incorporeal or intangible goods, which are proposed to be taxed at 4% under the provisions of the Act? Position under the Delhi Sales Tax Act, 1975 : Circular No. 28 of dated 27th July, 2000 provided that the term goods includes incorporeal or intangible articles like electricity, lottery tickets, REP licences, exim scrips, copy rights, patents, goodwill, trademarks and royalty and transfer of property thereof from one person to another for a valuable consideration is exigible to sales tax.

2 2 Position as per judicial pronouncements : Honourable Supreme Court of India in the case of Vikas Sales Corporation v. Commissioner of Commercial Taxes [1996] 102 STC 106 (SC), while considering the issue of REP licences as taxable goods noted that : In its largest sense property signifies things and rights considered as having a money value, especially with reference to transfer or succession, and to their capacity of being injured. Property includes not only ownership, estates, and interests in corporeal things, but also rights such as trademarks, copyrights, patents, and rights in personam capable of transfer or transmission, such as debts. In the same case, apex Court observed that clauses (c) and (d) in this definition (revised definition of sale brought in by constitutional amendment) are relevant to the present controversy. Clause (d) provides that even where a right to use any goods is transferable for cash, deferred payment or other valuable consideration, it will be a sale or purchase of goods for the purpose of the Constitution. The Court referred to the definition of 'goods' and 'sale' in both the aforesaid enactments, the definition of 'goods' in Article 366(12) and the definition of "tax on the sale or purchase of goods" in Article 366 (29-A). It referred to the meaning of the expression "lottery ticket" in law dictionaries and decided cases; it referred to the definition of "moveable property" in the General Clauses Act, 1897 and the definition of the expression "actionable claims" in Section 3 of the Transfer of Property Act, 1882 and observed (Tulzapurkar, J., speaking for the Bench comprising himself and Sabyasachi Mukharji, J.) : (SCC p. 438, paras 32 and 33) "If incorporeal right like copyright or an intangible thing like electric energy can be regarded as goods exigible to sales tax there is no reason why the entitlement to a right to participate in a draw which is beneficial interest in moveable property of incorporeal or intangible character should not be regarded as goods for the purpose of levying sales tax. As stated above lottery tickets which comprise such entitlement do constitute a stockin-trade of every dealer and therefore is merchandise which can be bought and sold in the market. Lottery tickets comprising such entitlement, therefore, would fall within the definition of 'goods' given in the Tamil Nadu Act and the Bengal Act. In the light of the aforesaid discussion my conclusions are that lottery tickets to the extent that they comprise the entitlement to participate in the draw are 'goods' property so called, squarely falling within the definition of that expression as given in the Tamil Nadu Act, 1959 and the Bengal Act, 1941, that to that extent they are not actionable claims and that in every sale thereof a transfer of property in the goods is involved." It has further been observed by the Hon ble Supreme Court in the case of Vikas Sales Corporation (SUPRA) that the argument that licences/scrips constitute securities within the meaning of clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956, and therefore, stand excluded from the definition of 'goods' contained in Tamil Nadu, Kerala and Karnataka Sales Tax Acts as well as Central Sales Tax Act. The contention is

3 3 misconceived. It is true that the definition of 'goods' in the said sales tax enactments does exclude securities, but the question is whether these licences/scrips are securities. They are not. Before the definition of the expression 'securities' in clause (h) of Section 2 of the Securities Contracts (Regulation) Act was amended by Act 15 of 1992, the definition read thus: "2. (h) 'securities' include (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like navure in or of any incorporated company or other body corporate; (ii) Government securities; and (iii) rights or interests in securities." By the said Amendment Act, sub-clause (ii-a) was added in the said definition, which read : "(ii-a) such other instruments as may be declared by the Central Government to be securities;" In another important decision of the Supreme Court in the case of State Of Uttar Pradesh And Another V. Union Of India And Another (130)- STC SC, the following relevant observation has been made: Before taking up the other contentions, we may conveniently dispose of a short point - ambit of the definition of the term "goods quoted above. It is defined in very wide terms so as to bring in both tangible and intangible " - objects. It takes in its fold every kind or class of movables, including all material commodities and articles involved in the execution of a works contract, and growing crops, grass, trees and things attached to or fastened to anything permanently attached to the earth which under the contract of sale are agreed to be severed but excluding actionable claims, stocks, shares, securities or postal stationery sold by the Postal Department. According to the DoT, what is being supplied as service is a telephone connection with an instrument which is connected with permanent telephone lines laid up to the subscriber's place where the telephone system is installed and the same is connected with the exchange. Telephone instruments and other movables, including wiring, cable, etc., are undoubtedly goods. However, the position of telephone exchange was not without demur on the ground that they were housed in immovable properties. That objection need not detain us because intangible object, like electricity which is generated in projects and transmitted through sub-stations, housed in buildings, has been held to be goods. In Commissioner of Sales Tax, Madhya Pradesh v. Madhya Pradesh Electricity Board ([1970] 25 STC 188) (1969) 1 SCC 200, a Bench of three learned Judges of this Court took the view that the electricity falls within the meaning of "goods" under the Madhya Pradesh General Sales Tax Act, That view was affirmed in a recent judgment of a Constitution Bench of this Court in State of A.P. v. National Thermal Power Corporation Ltd. ([2002] 127 STC 280) (2002) 5 SCC 203 holding that electricity though an intangible object is goods covered by entry 54 of List II of the Seventh Schedule to the Constitution as also section 2(d) of the Central Sales Tax Act, The Supreme Court of Wisconsin (U.S.A.) in Mckinley Telephone Company v. Cumberland Telephone Company (1913) 152 Wis. 359; 140 N.W. 38; 1913 Wisc. Lexis 77 held the view that the furnishing of telephone service might be classed as

4 4 the supplying of a commodity constituting a subject of commerce. We, therefore, have no hesitation in holding that telephone connection and all other accessories which give access to the telephone exchange with or without instruments are "goods" within the meaning of section 2(d) of the U.P. Act. Thus, it can be concluded that the addition of words tangible or intangible included in the definition of the word goods in the Haryana Value Added Tax Act, 2003 or any other state Sales Tax Act is by way of clarification only. Intangible goods were taxable goods otherwise also as declared by the Apex Court. Situs and taxable event of sale of intangibles: The situs of sale can only be fixed either by the appropriate Legislature or by Judge-made law and there is no settled principles for determining the situs of sale. The honourable Supreme Court in the case of 20th Century Finance Corpn. Ltd. v. State of Maharashtra [2000] 119 STC 182 (SC) in relation of situs and taxable event of deemed sale under clause (d) (as stated above) concluded that: The appropriate Legislature by creating legal fiction can fix situs of sale. In the absence of any such legal fiction, the situs of sale, would be the place where the property in goods passes, i.e., where written agreement is executed. In the case of Vikas Sales Corporation [1996] 102 STC 106 the honourable Supreme Court observed that the definition given in clause (d) is relevant to present controversy. Thus, the rule as to situs of sale concluded by Supreme Court will be applicable to sale of intangible assets. From the above, it can be concluded that the taxable event in case of sale of intangibles will be the time of signing of agreement for the sale of intangible asset. The situs of sale in these cases will be the place where the agreement is entered into. Inter-State sale of intangibles: All of us know that the question whether a sale is an inter-state sale or not, has to be answered only with reference to and on the basis of section 3 of the Central Sales Tax Act, The honourable Supreme Court in the landmark judgment of Gannon Dunkerley & Co. v. State of Rajasthan [1989] 73 STC 370 (SC) has also provided that the State Legislature while enacting the sales tax legislation for the State cannot make a departure from those principles. As per section 3 of the CST Act, a sale or purchase shall be deemed to take place in the course of inter-state trade or commerce if the sale or purchase : (a) Occasions the movement of goods from one State to another, or

5 5 (b) Is effected by a transfer of documents of title to the goods during their movement from one State to another. Explanation 1 to the definition provides that where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall, for the purposes of clause (b), be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee. The honourable Supreme Court, in the case of Balabhagas Hulaschand v. State of Orissa [1976] 37 STC 207 (SC) prescribed the following conditions for treating a sale as an inter-state sale : (a) There is an agreement to sell which contains an express or implied stipulation regarding the movement of goods from one State to another ; (b) The goods in fact moved from one State to another in pursuance of said contract ; and (c) Ultimately a concluded sale takes place in the State where the goods are sent which must be different from the State from which goods move. Applying the above principle in case of sale of intangible goods, how do we say that the goods moved from one State to another? Can we conclude the following: 1. Where there is written agreement of sale of any of these tangibles, it will be treated as a case of local sale in the State, where this agreement is entered into. 2. Where there is no written agreement and buyer and seller of intangibles are located in different States, the sale of intangibles be deemed to be in the course of inter-state sale from the State of buyer to the State of seller. Position in respect of sale of DEPB : DEPB is a piece of paper in the name of the exporter giving him right to an amount as mentioned on such paper. Can we say that piece of paper as tangible goods and movement of that piece of paper from one State to another State as the basis of inter-state sale of DEPB. If this be so, then DEPB does not come in the definition of incorporeal or intangible goods and will not then be covered by Schedule C and will thus attract a different rate of tax. The state of Rajasthan have very recently issued the following Notification with respect to taxability of intangible goods: Notification No. S.O.63. F.4 (67) FD/Tax / Dt: July 12,2004 In exercise of the powers conferred by section 15 of the Rajasthan Sales Tax Act, 1994 (Rajasthan Act No. 22 of 1995), the State Government being of the opinion

6 6 that it is expedient in the public interest so to do, hereby exempts from tax under the said Act, the sale or the purchase of the following goods, namely:- Description of the goods: Special Import Licence, Duty Entitlement Pass Book, EP Licence and exim scrips, Non Quota Entitlement, Part Performance Entitlement. Under the U.P. Trade Tax Act the position of taxability of intangible goods is as follows :- 1. As per Notification No. KA-NI-II-101/ XI-9 (231)/94 dated as per Item No. 60, the Patent, Trademark, Import License, Export Permit or License or Kota has been put under 8% at the point of manufacturer/ importer i.e. 1 st point. The above referred rate of Trade Tax was applicable on and remained till Another Notification No. KA.NI-II-523/XI dated have been issued under which an Item No. 60 the Patent, Trademark, Export Permit or License or Kota excluding Import Permit has been put under 5%. 3. Further, the Government of U.P. has issued a Notification No. ST-NI-II-528 dated by which sale and transfer of import liecnce has been made exempt w.e.f Thus, effect of above-referred two Notifications imposing tax from on import liecnce has been nullified. The Government of U.P. have clarified vide their G.O. Letter No. TT-ii-3708/XI (16) / 03 dated that DEPB as defined U/s 2 (g) of the Foreign Trade (Development & Regulation) Act 1992 is covered under the term Import License and thus the sale of DEPB entitlement shall be exempt under the Notification mentioned above. 4. Under Notification No. TT-ii-5193/ELEVEN /9 (16) /2003 dated 23 rd December 2003 had levied w.e.f. 1 st January 2004 Trade 0.5% on sale of all types of Import Licenses including Duty Entitlement Pass Book (DEPB).