M/S Kuttukkaran Trading Ventures v. State of Kerala

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE BASANT BALAJI TUESDAY, THE 7[TH] DAY OF FEBRUARY 2023 / 18TH MAGHA, 1944 ## OT.REV NO. 51 OF 2018 AGAINST THE ORDER OTHERS 471/2014 OF KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM REVISION PETITIONER/S: M/S.KUTTUKKARAN TRADING VENTURES MAMANGALAM,ERNAKULAM,COCHIN-682025,REPRESENTED BY FRANCIS.K.PAUL,PARTNER. BY ADVS. SRI.JOSE JOSEPH SRI.AJAY V.ANAND RESPONDENT/S: STATE OF KERALA, REPRESENTED BY DEPUTY COMMISSIONER (LAW),COMMERCIAL TAXES,REVENUE TOWER,ERNAKULAM. ## OTHER PRESENT: SMT. M. M. JASMINE - GP THIS OTHER TAX REVISION (VAT) HAVING RESERVED ON 11.01.2023, ALONG WITH OT.Rev.52/2018, 53/2018, THE COURT ON 07.02.2023 DELIVERED THE FOLLOWING: **O.T.(Rev.) Nos.51, 52 & 53/2018** **-2-** IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE BASANT BALAJI TUESDAY, THE 7[TH] DAY OF FEBRUARY 2023 / 18TH MAGHA, 1944 OT.REV NO. 52 OF 2018 AGAINST THE ORDER TAVAT 472/2014 OF KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM REVISION PETITIONER/S: KUTTUKKARAN TRADING VENTURES, MAMANGALAM, ERNAKULAM, COCHIN - 682 025, REPRESENTED BY FRANCIS K.PAUL, PARTNER. BY ADVS. SRI.JOSE JOSEPH SRI.AJAY V.ANAND RESPONDENT/S: STATE OF KERALA, REPRESENTED BY DEPUTY COMMISSIONER (LAW), COMMERCIAL TAXES, REVENUE TOWER, ERNAKULAM. SMT. M. M. JASMINE - GP THIS OTHER TAX REVISION (VAT) HAVING RESERVED ON 11.02.2023 ALONG WITH OT.Rev.51/2018 AND CONNECTED CASES, THE COURT ON 07.02.2023 DELIVERED THE FOLLOWING: **O.T.(Rev.) Nos.51, 52 & 53/2018** **-3-** IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE BASANT BALAJI TUESDAY, THE 7[TH] DAY OF FEBRUARY 2023 / 18TH MAGHA, 1944 OT.REV NO. 53 OF 2018 AGAINST THE ORDER TAVAT 473/2014 OF KERALA VAT APPELLATE TRIBUNAL, ERNAKULAM REVISION PETITIONER/S: M/S KUTTUKKARAN TRADING VENTURES, MAMANGALAM, ERNAKULAM, COCHIN - 682 025 REPRESENTED BY FRANCIS.K.PAUL, PARTNER. BY ADVS.SRI.JOSE JOSEPH SRI.AJAY V.ANAND ## RESPONDENT/S: STATE OF KERALA, DEPUTY COMMISSIONER (LAW) COMMERCIAL TAXES, REVENUE TOWER, ERNAKULAM 682 011. SMT. M. M. JASMINE - GP THIS OTHER TAX REVISION (VAT) HAVING RESERVED ON 11.01.2023, ALONG WITH OT.Rev.51/2018 AND CONNECTED CASES, THE COURT ON 07.02.2023 DELIVERED THE FOLLOWING: **O.T.(Rev.) Nos.51, 52 & 53/2018** **-4-** ## O R D E R [OT.Rev Nos.51/2018, 52/2018, 53/2018] S.V. Bhatti, J. We have heard Mr Jose Joseph, learned counsel for the petitioner and learned Government Pleader M M Jasmin for the respondent. 2. M/s. Kuttukkaran Trading Ventures/a dealer registered under the KVAT Act (for short, the Act), is the petitioner in the three Tax Revisions. The State of Kerala, represented by the Deputy Commissioner (Law), Commercial Taxes Department, Ernakulam, is the respondent in these cases. The revisions arise from the common order dated 26.02.2018 in T.A.(VAT) Nos.471, 472, and 473/2014 before the Kerala Value Added Tax Appellate Tribunal, Ernakulam (for short, the Tribunal). The details of the return period, orders of the **-5-** ## **O.T.(Rev.) Nos.51, 52 & 53/2018** ## authorities etc., are stated hereunder: |Sl.<br>No.|Order of<br>assessment<br>and<br>Assessment<br>year|Order of the Deputy<br>Commissioner<br>(Appeals)|Order of the<br>Tribunal|O.T.REV.| |---|---|---|---|---| |1.|Dated<br>29.06.2013:<br>2008-09|KVATA-2177/2013<br>dated 23.06.2014|TA (VAT)<br>No.471/2014|51/2018| |2|Dated<br>19.02.2013;<br>2009-10|KVATA-1325/2013<br>dated 23.06.2014|TA (VAT)<br>No.472/2014|52/2018| |3|Dated<br>21.08.2013:<br>2011-12|KVATA-2846/2013<br>dated 23.06.2014|TA (VAT)<br>No.473/2014|53/2018| O.T. Rev. No.51/2018 has been treated as the lead case. The details set out therein are adverted. OT Rev.51/2018 3. The dealer had set up an infrastructure facility for the service and maintenance of Maruti vehicles at four locations in the State of Kerala. The dealer granted a license to M/s. Popular Vehicles and Services Ltd to run the service centres ## **O.T.(Rev.) Nos.51, 52 & 53/2018** **-6-** established by the dealer. The consideration constituted payment of 80% of the operating profit in a ratio of 80:20. The dealer, for the return period 2008-09, received Rs.1,82,36,107/- as a license fee from M/s. Popular Vehicles and Services Ltd. From the nature of the arrangement between the dealer and M/s. The dealer, popular Vehicles and Services Ltd, treated the licence fee received as attracting tax incidence under the Finance Act 1994. The dealer paid service tax on the licence fee received from M/s. Popular Vehicles and Services Ltd. The Assistant Commissioner, Special Circle-1, Commercial Taxes, Ernakulam, through Annexure III Assessment order dated 29.06.2013, included the license fee as taxable turnover under the Act. The consideration by the Assessing Officer reads thus: “……. The last contention of the assessee is that the licence fee obtained by the assessee. The assessee has produced all the machinery for service and workshop for M/s Popular vehicle and services for their exclusive use. Hence that will squarely **O.T.(Rev.) Nos.51, 52 & 53/2018** **-7-** come under ambit of the term right to use. The contention of the assessee is that the agreement in license for running a service centre using the shed, infrastructure facilities created therein and the vacant area. The said contention of the assessee is not correct. As per the agreement the assessee is eligible for certain percentage of net profit on the source income. Hence the share of the expenses met by the said dealer is not form part of the licence fee. Further out of the four centres in Kerala two centres were rented buildings and the assessee is in paying rent for the same and there is reimbursement of rented income for the said immovable properties. Further as per clause 8 of the term and conditions it stock that "it shall construed by both the licenser and license that this is purely a licence agreement and the fee being paid by the licence to licensor to license fee and that it shall not in anyway come under the Kerala Building (lease and rent control) Act". The rent for the building and immovable properties were governed through the above said Act. Hence the intention of the agreement is only regarding to the movable property alone. The assessee has cited the decision of the 20th Century Finance Corporation Ltd., (119 STC 182) the delivery of goods in the basic element to constitute a deemed sale of transfer of right to use and contented that, hence there is no delivery of goods. The machineries owned by the assessee was delivered you back for the right to use and that comment **-8-** ## **O.T.(Rev.) Nos.51, 52 & 53/2018** were executed through renewing it will constitute the delivery and the said ruling has no application. Here the delivery was actually done through the renewal of agreement. Hence the said ruling have no application here and there is no necessity to deviate from the proposal already made in this point.” The Deputy Commissioner (Appeals) and the Tribunal have confirmed the view the assessing officer took. Hence, the revisions at the instance of the dealer. 4. Adv. Jose Joseph contends that the Constitution (46[th] Amendment) Act introduced Clause 29A to Article 366 of the Constitution of India. The Supreme Court in _Bharat Sanchar Nigam Ltd. v. Union of India_[1] considered the effect and operation of Clause 29A of Article 366 of the Constitution on composite contracts. He relied on the following paragraphs in the said reported judgment: “41. Recommendation (c) of the Law Commission to amend > 1 145 STC 91 **O.T.(Rev.) Nos.51, 52 & 53/2018** **-9-** article 366 by expanding the definition of "sale" to include the transactions negatived by Courts, was accepted by the Government. The Constitution (46th Amendment) Bill, 1981, which was subsequently enacted as the Constitution 46th Amendment Act, 1982 set out the background in which the amendment to article 366(29A) of the Constitution was amended. Having noted the various decisions of the Supreme Court as well as of the High Courts excluding certain transactions from the scope of sale for the purpose of levy of sales tax, it was said that the position had resulted in scope for avoidance of tax in various ways. In the circumstances, it was considered desirable to put the matter beyond any doubt. Article 366 was therefore amended by inserting a definition of "tax on the sale or purchase of goods" in clause (29A). The definition reads: "(29A) ‘tax on the sale or purchase of goods' includes- (a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other Valuable consideration: (b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (c) a tax on the delivery of goods on hire-purchase or any sys tem of payment by instalments; **O.T.(Rev.) Nos.51, 52 & 53/2018** ## **-10-** (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment D or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;" 42. Clause (a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale. Clause (b) covers cases relating to works contracts. This was the particular fact-situation which the court was faced with in Gannon Dunkerley and which the court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley' was directly overcame Clause (c) deals with hire- **O.T.(Rev.) Nos.51, 52 & 53/2018** **-11-** purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarly the G title to the goods under clause (d) remains with the transferor who only transfers the right to use the goods to the purchaser. In other words, contrary to A.V. Meiyappan's decision [1967] 20 STC 115 (Mad.) a lease of a negative print of a picture would be a sale, Clause (e) covers cases which in law may not have amounted to sale because the member of an association would have in a sense begun both the supplier and the recipient of the supply of goods. Now such transactions are deemed sales. Clause (f) pertains to contracts which had been held not to amount to sale in State of Punjab v. Associated Hotels of India Ltd. (1972) 1 SCC 472. That decision has by this clause been effectively legislatively invalidated. 43. All the clauses of article 366(29A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act, 1930 are absent, within the ambit of purchases and sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dunkerly limited. The amendment especially allows specific composite contracts, viz., works contracts [clause (b)], hire purchase contracts [clause (e)] catering contracts clause (D) by legal fiction, to be divisible contracts where the sale element could be isolated and be subjected to sales tax. **O.T.(Rev.) Nos.51, 52 & 53/2018** **-12-** 44. Gannon Dunkerley survived the 46th Constitutional Amendment in two respects. First with regard to the definition of "sale" for the purposes of the Constitution in general and for the purposes of entry 54 of List II in particular except to the extent that the clauses in article 366(29A) operate. By introducing separate categories of deemed sales", the meaning of the word "goods" was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, goods, delivery, etc., would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. Courts must move with the times. But the 46th Amendment does not give a licence for example to assume that a transaction is a sale and then to look around for what could be the goods. The word "goods" has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by article Transactions which are mutant sales are limited to the clauses of 366(29A). All other transactions would have to qualify as sales within the meaning of the Sales of Goods Act, 1930 G for the purpose of levy of sales tax. 45. Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, **O.T.(Rev.) Nos.51, 52 & 53/2018** **-13-** a works contract hire purchase contract and a catering contract to within the fiction of a deemed sale Of these three, the first H and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in clauses (b) and (D) of clause (29A) of article 366, there is no other service which has been permitted to be so split. For example the clauses of article 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases. 46. The reason why these services do not involve a sale for the purposes of entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley's case [1958] 9 STC 353 (SC), namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in article 366(29A), unless the transaction in truth represents two distinct and separate **-14-** ## **O.T.(Rev.) Nos.51, 52 & 53/2018** contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in article 366(29A) continues to be-did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be dis- integrated. The test for deciding whether a contract falls into one category or the other is as to what is "the substance of the contract". We will, for the want of a better phrase, call this the dominant nature test.” 4.1 Therefore, the argument proceeds that the subject license agreement cannot come under any of the composite agreements. The authorities misdirected themselves by including the licence fee in the assessee's turnover. Section 2(lii) is not attracted to the case on hand, and there is no deemed sale or transfer of goods by the dealer. He further contends that the Tribunal misdirected itself by referring to the ## **O.T.(Rev.) Nos.51, 52 & 53/2018** **==> picture [22 x 10] intentionally omitted <==** precedents first and applying the circumstances of the case to those precedents. The three categories of works contract now recognised by clause 29A of Article 366 are not attracted to the case on hand. The case on hand comes entirely within the meaning of service received and provided as per the definitions of the Finance Act 1994. The dealer is earnest in paying tax, treating the receipt of the license fee as a fee received and attracting service tax incidence. The case on hand is not equated with evasion or suppression of tax but tax paid as per the incidence attracting a statute. He has invited our attention to Annexure A(1), i.e., the agreement dated 22.11.2005 to persuade this Court to set aside the findings recorded by all three authorities. He has relied on the following judgments: _Image Creative Pvt. Ltd v. Commissioner of Commercial Taxes_[2] , > 2 (2008) 12 VST 371)(SC) ## **O.T.(Rev.) Nos.51, 52 & 53/2018** **-16-** _Commissioner of Trade Tax, UP v. Triveni N.L Ltd_[3] , _State of Andhra_ . _Pradesh & Another v. Rashtriya Ispat Nigam Ltd_[4] 5. Government Pleader Jasmin contends that the authorities under the Act have appreciated the transfer of the right to use by the dealer in favour of M/s. Popular Vehicles and Services Ltd, on the strength of personal inspection, carried out by the Officers of the Department, agreement relied on by the dealer. The jurisdiction of this Court under Section 63 on the well-considered findings of the authorities under the Act is not attracted. The construction of the agreement is legal and valid. The grounds now canvassed by the dealer ought not to be entertained by this Court, primarily because the issue invites consideration of the license agreement said to have been executed between the dealer and M/s. Popular Vehicles and Services Ltd. The agreement, it is argued, does not contain > 3 (2014) 72 VST 448) (All.) > 4 (2002) 126 STC 114) (SC) ## **O.T.(Rev.) Nos.51, 52 & 53/2018** **-17-** schedules constituting the right to transfer. Whether the complete agreements have been produced before any authority makes a substantial difference in appreciating any argument of the dealer in this Court. Firstly, she argues that the findings of fact do not warrant the interference of this Court under Section 63 of the Act. Secondly, the payment of service tax is no grounds to avoid payment of value-added tax under the Act if the transaction attracts the VAT Act. She vehemently contends that the license agreement should not be relied on for accepting any of the contentions or canvassed by the dealer. 5.1 The learned Government Pleader contends that the license agreement is treated as complete in all aspects, and then the construction of the license agreement by all three authorities is legal and valid. Alternatively, suppose the deficiency noted by the Court in the agreement is _prima facie_ accepted in favour of the Department; in that case, interpreting **-18-** ## **O.T.(Rev.) Nos.51, 52 & 53/2018** and construing such a document is an avoidable exercise. 6. We have taken note of the rival contentions and perused the record. For us to express a view on the interpretation or construction of the license agreement, first, the license agreement, either from intrinsic examination or as tried to raise a doubt that the license agreement is incomplete, must not exist. We have perused Annexure I. At this juncture, for the view we are proposing to take, a little more scrutiny by the Assessing Officer would have helped considering the petitioner’s legal argument. Our construction will undoubtedly result in prejudice to one party or the other. The answer to the issue on hand substantially turns upon the license agreement, inspection report, etc. The interpretation now accepted by the Tribunal based on the Annexure I agreement does not appear sound and tenable. Therefore, whether the license fee received by the dealer forms part of the turnover of the return period **O.T.(Rev.) Nos.51, 52 & 53/2018** **-19-** needs to be reexamined by the Assessing Officer or whether ingredients of service tax are attracted. 6.1 The counsel suggested preserving all the contentions available to both parties upon remand. In other words, the counsel desired an open remand of the case to the Assessing Officer. We appreciate the argument, so we are not dwelling deep into the matter. The dealer is allowed to place on record the license agreement, if not already placed, during the hearing by enclosing a copy of this order. For the view we have taken in the preceding paragraphs, the orders under revision need to be set aside, accordingly set aside, and the matter remitted to the Assessing Officer for disposal afresh. O.T. Rev. Nos.52 & 53/2018 7. For the reasons mentioned above, the orders under revision are liable to be interfered with and set aside. **O.T.(Rev.) Nos.51, 52 & 53/2018** **-20-** Accordingly, O.T. Rev. Nos. 51, 52 and 53/2018 are allowed. Matters are remitted to the Assessing Officer for consideration and disposal afresh. No order as to costs. Sd/S.V. BHATTI JUDGE Sd/- BASANT BALAJI JUDGE jjj ## **O.T.(Rev.) Nos.51, 52 & 53/2018** ## **-21-** ## APPENDIX OF OT.REV 52/2018 PETITIONER ANNEXURES ANNEXURE 1 TRUE COPY OF AGREEMENT OF LICENSE DATED 30.5. 2006. ANNEXURE II TRUE COPIES OF THE HALF YEARLY RETURNS UNDER THE FINANCE ACT 1994, FOR THE EYER 2009-10 ALONG WITH STATEMENT OF SERVICES TAX PAID. DATED 20.10.2009 , 26.4.2010 - ANNEXURE III TRUE COPY OF ASSESSMENT ORDER UNDER THE KVAT ACT FOR THE YEAR 2009-10 DATED 19.2.2013. ANNEXURE IV TRUE COPY OF ORDER OF THE DEPUTY COMMISSIONER (APPEALS) IN KVATA NO 1325/2013. DATED 23.6.2014. ANNEXURE V TRUE COPY OF THE APPEAL BEFORE THE KVAT APPELLATE TRIBUNAL FOR THE YEAR 2009-10 DATED 15.9.2014. ANNEXURE VI COMMON ORDER OF THE KVAT APPELLATE TRIBUNAL IN TA (VAT) NOS 471/14, 472/14 AND 473/2014 DATED 13.3.2018. ## **O.T.(Rev.) Nos.51, 52 & 53/2018** **-22-** ## APPENDIX OF OT.REV 53/2018 PETITIONER ANNEXURES ANNEXURE 1 TRUE COPY OF AGREEMENT OF LICENSE - ANNEXURE II TRUE COPIES OF THE HALF YEARLY RETURNS UNDER THE FINANCE ACT, 1994 FOR THE YEAR 2011-12 ALONG WITH STATEMENT OF SERVICE TAX PAID ANNEXURE III TRUE COPY OF ASSESSMENT ORDER UNDER THE KVAT ACT FOR THE YEAR 2011-12 - ANNEXURE IV TRUE COPY OF ORDER OF THE DEPUTY COMMISSIONER (APPEALS) IN KVATA NO. 2846/2013 ANNEXURE V TRUE COPY OF THE APPEAL BEFORE THE KVAT APPELLATE TRIBUNAL FOR THE YEAR 2011-12 ANNEXURE VI COMMON ORDER OF THE KVAT APPELLATE TRIBUNAL IN TA (VAT) NOS 471/14,472/14 AND 473/2014 **O.T.(Rev.) Nos.51, 52 & 53/2018** **-23-** ## APPENDIX OF OT.REV 51/2018 PETITIONER ANNEXURES ANNEXURE 1 TRUE COPY OF AGREEMENT OF LICENSE DATED 30.5.2006. ANNEXURE II TRUE COPIES OF THE HALF YEARLY RETURNS UNDER THE FINANCE ACT, 1994 FOR THE YEAR 2008-09 ALONG WITH STATEMENT OF SERVICE TAX PAID. DATED 17.10.2008/ 21.4.2009. ANNEXURE III TRUE COPY OF ASSESSMENT ORDER UNDER THE KVAT ACT FOR THE YEAR 2008-09. DATED 29.6.20113. ANNEXURE IV TRUE COPY OF ORDER OF THE DEPUTY COMMISSIONER (APPEALS) IN KVATA NO. 2177/2013 DATED 23.6.2014. ANNEXURE V TRUE COPY OF THE APPEALS BEFORE THE KVAT APPELLATE TRIBUNAL. DATED 15.9.2014. ANNEXURE VI COMMON ORDER OF THE KVAT APPELLATE TRIBUNAL IN TA (VAT) NOS 471/14, 472/14 AND 473/2014 DATED 13.3.2018.