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“Deemed sale” – it is a critical aspect of the Sales Tax law and it is going to have direct impact on the upcoming Negative list scheme. The new definition of service as defined in context of negative list excludes the deemed sale. In other words, service tax is not to be levied on the deemed sale. However, simultaneously, the concept of declared services is also brought into the service tax law where certain services are declared to be “services” for the purpose of levy of service tax. Some of these declared services are part of transactions which include the deemed sale; thus, there are certain transactions which will be subject to both sales tax as well as service tax. This bit of diction is about those transactions which will suffer dual taxes – sales tax as well as service tax.

Definition of service:-

Under negative list, all the “services” unless specified under negative list or otherwise exempted, will be chargeable to service tax. As such, the definition of “service” will going to play the lead role as always in the service tax law. The new definition of “service” is being given under clause 44 of section 65B of the Finance Act which reads as follows:-

“(44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

(a) an activity which constitutes merely,-

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) such transfer, delivery or supply of any goods which is deemed to be sale within the meaning of clause (29A) of article 366 of the Constitution; or

(iii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time being in force.

Explanation 1.- For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to,-

(A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or

(B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or

(C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section.

Explanation 2.- For the purposes of this clause, transaction in money shall not include any any activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

Explanation 3.- For the purposes of this Chapter,-

(a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;

(b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.

Explanation 4.- A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory;

The analysis of above definition of service makes it clear that the service will not include those activities which includes transfer, delivery or supply of any goods which is deemed to be sale within the meaning of clause (29A) of article 366 of the Constitution.

Concept of Deemed Sale in Constitution of India:-

Clause (29A) of Article 366 of Constitution of India defines the deemed sale. This clause reads as follows:-

“(29A) tax on the sale or purchase of goods includes

(a) a tax on the transfer, otherwise than in pursuance of a contact, 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) invoked in the execution of a works contract;

(c) a tax on the delivery of goods on hire purchase or any system of payment by installments;

(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 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;”

Thus, the above clause specifies the cases which the tax in relation to sale and purchase of goods will include and also outlines its applicability even in the case of deemed sale. This clause also includes the works contract, hire purchase, supply of food or drink, etc.

Concept of Declared services:-

Section 66E has been introduced in the negative list scheme which prescribes certain services which will be deemed to be services irrespective of the fact whether the same fall under the definition of service or not. Accordingly the service tax will be levied thereupon. This section reads as follows:-

“66E. The following shall constitute declared services, namely:-

(a) renting of immovable property;

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority.

Explanation.- For the purposes of this clause,-

(I) the expression "competent authority" means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:-

(A) architect registered with the Council of Architecture constituted under the Architects Act, 1972; or (20 of 1972.)

(B) chartered engineer registered with the Institution of Engineers (India); or

(C) licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(II) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure;

(c) temporary transfer or permitting the use or enjoyment of any intellectual property right;

(d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software;

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

(f) transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods;

(g) activities in relation to delivery of goods on hire purchase or any system of payment by installments;

(h) service portion in the execution of a works contract;

(i) service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.”

Thus, the declared services includes the services of renting of immovable property, works contract, hire purchase/installment payment system, supply of food /drink, etc. In other words, under constitution what are related to deemed sale are also covered under deemed service as per above section.

Overlapping and double taxation:-

Though, under the declared services the service portion is held to be liable to service tax payment, yet this concept is not free from ambiguities and double taxation. It can be said that there is overlapping between the sale and service component and a certain amount in every transaction is being subject to both sales tax and service tax. For eg., in the case of supply of food and drink, say, the abatement of 30% is allowed and sales tax is charged on the 70% of gross value charged. On the other hand, the same transaction in service tax is subject to abatement of 60% and accordingly taxable portion is 40%. If we present the above example in tabular form:-


Sales Tax

Service tax

Gross value charged in Rs.



Less: Abatement



Net value chargeable to tax in Rs.



Thus, sales tax is paid on Rs. 70/- and service tax is paid on Rs. 40/-, totaling Rs. 110/-. Or in other words we can say that both service tax as well as sales tax are charged on Rs.10/- in above case. Therefore there is overlapping in the taxable portion of similar cases and double taxation does exists.

Other problems:-

The above problems of overlapping and double taxation exists due to different framework of sales tax and service tax which don’t have any co-ordination as one is levied by the State and other by the Centre. However, there are much more difficulties in the practical implementation of both the levies simultaneously on the same transactions. The hon’ble Supreme Court has laid down the “Dominant Nature Test” in the case of Bharat Sanchar Nigam Limited vs Union of India [2006(2) STR 161 (SC)] which says that in the composite contracts whether the sales tax would be levied or service tax, it is to be checked what is the substance of the contract, if the intention of the parties is sale of goods and services are the ancillaries, then, sales tax would be levied or vice versa. However, even after six years of this judgment, the assessee is not able to decide what is the “dominant nature”, as the sales tax authorities contend that it is the sale and the service tax department contends that it is the service. The VAT authorities don’t accept the contentions of the assessees, they are simply concerned about the fact that the transaction is covered by the VAT law and accordingly demand is raised. Similar is the view of service tax authorities also and the service tax demand is also raised simultaneously on the same amount. There is repeated conflict between the assessees and both of these departments and what most often happens is that the assessee gives up and starts paying both of these taxes on the same amount irrespective of the fact that the government does not intends to collects both the taxes simultaneously on the same amount.

Some sufferers of double taxation & applicable case laws:-

The main sufferers of dispute of goods or services are assessees like the suppliers of SIM cards, software services, photography services. Besides the decision of hon’ble Supreme Court in the case of BSNL, there are a no. of divergent decisions wherein different analogies have been laid down. In the case of Imagic Creative Pvt. Ltd. vs. Commissioner of Commercial Taxes [2008 (9) S.T.R. 337 (S.C.)], it was held that levy of two taxes are independent and should be applied looking to the circumstances of the each case. In the case of Tata consultancy Services vs. State of Andhra Pradesh [2004-TIOL-87-SC-CT-LB], it was held that software is goods because goods can be tangible or intangible movable properties including commodities and articles. But even after this decision, the service tax is payable on information technology services. In the case of Associated Cement Companies Ltd. vs. Commissioner of Customs [2002-TIOL-08-SC-Cus], it was held that the actual transfer of property is relevant, if it is present, the provisions of customs act are applicable and goods are subject to custom duty. The dominant nature test was held rejected in this case. However, in the year 2011, the hon’ble Supreme Court in the case of Idea Mobile Communication. v CCE & CC, Cochin [2011-TIOL-71-ST-SC] has held that telecom operators will be required to pay service tax on the gross amount received from subscribers towards activation charges which includes the value of SIM card supplied to the subscriber. However, under this case, the sales tax authorities have dropped the demand and this fact was noted by the Supreme Court while confirming the demand. Thus, as of now, the situation is clear in case of SIM cards, but no clarification is there on the other sufferers of this issue. Thus, under the negative list also, by virtue of declared services concept, this dispute seems to be carried to new phase of service tax law.

Before parting:-

Under the current scheme of service tax by way of positive list, this issue was critical for certain transactions like SIM card sale/service, works contract, supply of food and drinks in restaurants or outside, etc. This issue is still being carried forward to the negative list inspite of the fact that the government does not intends for the same. However, some clarification is being required, that too on due time, else the switching over from positive list to negative list will not be an effective one as the deficiencies of the old scheme are being carried forward to the new scheme.

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Pradeep Jain
Category Service Tax   Report

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