This is my first article on CAclub. The main idea of this write up is to clear the concepts of "Sale", "Deemed Sale" & the main reason for introducing the concept of "Deemed Sale".
I would like to request all readers to please let me know if some amendment is required to the article.
Understanding “Sale” & “Deemed Sale”
1. Constitutional Power to Impose Sales Tax/VAT
The power to levy tax on “sale or purchase within state” is with the State government. This power comes to State from Article 246 of the Constitution of India read along with Article 245 & Seventh Schedule to the Constitution.
Part XI of the Constitution of India deals with relationship between the Union & the States. Article 245 of Part XI deals with “Extent of laws made by Parliament & by the Legislature of States”. Further, Article 246 governs the subject matter of laws made by Parliament & by the Legislature of States. The matters are listed in the Seventh Schedule to the Constitution. The Seventh Schedule is classified into three lists as follows:
1. List I – This list is referred as “Union List”. In respect of matters covered under this list, parliament has an exclusive right to make laws
2. List II – This list is referred as “State List”. In respect of matters covered under this list, state has an exclusive right to make laws.
3. List III – This list is referred as “Concurrent List”. In respect of matters covered under this list, state & parliament has an exclusive right to make laws.
Entry No 54 of List II reads – “Taxes on sale or purchase of goods other than newspaper, subject to the provisions of entry 92A of List I.
Entry No 92A of List I reads- “Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of Inter-State trade or commerce.”
As evident from above, as taxes on sale or purchase of goods (except Inter-State sale or purchase) is covered under List II, only State government has power to make laws on such matter.
In exercise of this power, all state governments have enacted VAT or Sales Tax laws for their respective states. VAT law enacted by each state extends to the sale or purchase of goods in the respective state only.
From above discussion, we can make out that we need to understand two important terminologies to understand VAT or Sales tax. These two important terms are:
1. Sale, &
NOTE: Throughout our discussion, we will use the terminology “Simple Sale” for “sale” covered by Entry 54 of List II
2. What is “Sale”
The term “sale” is defined differently under different VAT/Sales Tax laws for e.g. Maharashtra
Sec 2(24): “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration hut does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly;
Explanation,-—For the purposes of this clause,—
Sec 2(zc): “sale” with its grammatical variations and cognate expression means any transfer of property in goods by one person to another for cash or for deferred payment or for other valuable consideration (not including a grant or subvention payment made by one government agency or department, whether of the central government or of any state government, to another) and includes-
Sec 2(29):‘Sale’ with all its grammatical variation and cognate expressions means every transfer of the property in goods (other than by way of a mortgage, hypothecation, charge or pledge) by one person to another in the course of trade or business for cash or for deferred payment or other valuable consideration and includes,-
Sale of Goods Act 1930
Sec 4: A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price
As evident from above definitions, each VAT Act has its own definition of “Sale”. The definitions have “Explanation” or “Inclusions”. In majority cases, these inclusions are cases covered by “Deemed Sales”. We will discuss “Deemed Sales” later in our discussion. Now, for the purpose of clarity, sale means both of below:
1. “Simple Sale” as under Entry 54 of List II, &
2.”Deemed Sale” as covered under inclusion or explanations
3. What is the importance of definition of “Sale” as per Sale of Goods Act 1930?
The first question which might come to the mind of reader is “While reading VAT Act, why we are concerned with the definition of “Sale” as per Sale of Goods Act, 1930?”
The answer to it lies in decision of Supreme Court in case of Gannon Durnkley & Co Vs. The State of Madras. As per Supreme Court, sale of goods as in List II of Schedule VII must be interpreted as having the same meaning as in Sale of Goods Act. Thus, “Simple Sale” means “Sale” as defined under Sale of Goods Act, 1930.
4. “Sale” as per Sale of Goods Act, 1930
Sec 4 of Sale of Goods Act defines “Sale” as:
“A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.”
The elements of “Sale” as per above definition is:
· There has to be a “Contract”
· Between “Buyer” & “Seller”
· Of Transfer of Property
· For Price
Each element of “Sale” will be discussed in following paragraphs/points.
Any transaction having all the above elements will be classified as “Sale”. For our discussion, we call this sale as “Simple Sale”. Even if one of the elements is missing, transaction will not be a “simple sale”. As a matter of fact, the concept of “deemed sale” deems a transaction as “Sale” which do not have any one of above elements of “Sale”.
5. Meaning of “Contract”
Contract is not defined under “Sale of Goods Act, 1930”. As per Indian Contract Act, “an agreement enforceable by law is a contract.” An “agreement” is defined under Indian Contract Act as “every promise or set of promises, forming the consideration for each other”.
A Contract can be oral, written, express or implied. There must be free will of buyer & seller.
The essence of the contract must be “sale”. For e.g. during a visit to restaurant, there is an implied contract between restaurant & the customer. However, the essence of contract is not just to buy food, the customer also wish to enjoy other services offered by the restaurant such as its ambience etc. As the essence of contract is not just sale but sale plus services, such contract is not “Simple Sale”.
In other words, contract must be for “goods as goods” or “chattle as chattle”.
6. Meaning of “Between Buyer & Seller”
There has to be two distinct persons. The persons may be natural or artificial. A person can’t sell to himself. For e.g. there can be no sale between different branches of same dealer as each branch is not a distinct person. Though it may be possible that each branch has separate registration number under VAT Act. Similarly, there can’t be sale between principal & agent as both are not distinct persons.
7. Meaning of “Transfer of Property”
Sec 2(11) of Sale of Goods Act defines Property as “property means the general property in goods, & not merely a special property”.
General property is not defined under the Sale of goods Act but it means all rights & obligation which come as a bundle as result of ownership of goods. If one of such right is missing, it is not transfer of property so not a “Simple Sale.”
For e.g. in case of Hire Purchase, though all rights are transferred to buyer but the title of goods i.e. ownership is not transferred so Hire Purchase is not a “Simple Sale”.
8. Meaning of “Goods”
As per Sec 2(7) of Sale of goods Act " goods" means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.
Goods means all kind of movable property. It includes Intangible goods also. As goods means movable property, there will be no VAT on sale of immovable property. Entry 54 of List II specifically excludes Newspaper so there is no VAT on sale of it. VAT Act provide specific exclusions from the definition of goods. For e.g. stocks, shares, securities, actionable claims are not considered goods. Example of Intangible which are classified as “Goods” are Trademarks, Patents, Electricity, Software. Lottery is not goods. Maharashtra VAT Act specifically excludes lottery from definition of “Goods”.
9. Meaning of “Price”
Sec 2(10) of Sale of Goods Act defines price as “the money consideration for a sale of goods”.
Many VAT Acts, use “other valuable consideration” in definition of sale. “Other Valuable consideration” has been defined by Supreme Court in case of Devidass Gopal Krishen as “ cash, cheque, promissory note or equivalent to money”.
Concept of Barter System – Barter system means goods are exchanged for goods & quantification in money terms is not possible. Such transactions are outside the scope of VAT as consideration in “money terms” is not ascertainable. However, a transaction will not be a barter transaction if we can calculate “money consideration” from the transaction. For e.g. Mr.A gives to Mr.B entire year’s production of sugar & Mr. B in return leases out his sugar factory to Mr. A. Year end settlement is done by valuing sugar at government rates & lease rentals are netted. Only differential money flows from A to B or from B to A. This transaction, though appears to be barter, is chargeable to VAT as we can calculate “money consideration” from the contract.
Actual flow of money is not relevant. If price can be determined or manner of calculating price can be determined, it is “consideration” & transaction is liable to VAT.
10. Concept of “Deemed Sales”
As discussed in the beginning, VAT can be levied by States only on “Sale” (Simple Sale in our discussion) of goods. A transaction is not sale, if it is missing one of the elements of sale.
There are certain transactions which though appear as “Sale” are not “Sale” as they are missing one of the essential elements of “Sale”.
In order to bring such transactions in VAT net, concept of “Deemed Sale” is introduced by amending Constitution of India. Article 366 (29A) of the Constitution of India cover cases of “Deemed Sale”.
11. Article 366(29A) of the Constitution of India
(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;
Missing Element of Simple Sale – This clause cover cases of compulsory sale to Government authorities under Government order. One of the elements of Contract is free will of buyer & seller. However, free will of seller is missing in case of compulsory sale by government orders. As there is no free will, one of the element of Simple Sale is missing & the transaction will not be covered under “Simple Sale”. Hence, such transaction is “deemed as sale”.
(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;
Missing Element of Simple Sale – In case of works contract, goods are transferred not in same form. For e.g. in case of construction contract, bricks cement etc are transferred in the form of civil structure/building. As condition of goods being transferred as goods is not satisfied, such transaction will not fall under “Simple Sale”. Hence, such transaction is “deemed as sale”.
(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;
Missing Element of Simple Sale – In case of Hire Purchase, property passes only on payment of last instalment, so “Simple Sale” is affected only after last instalment is paid. The government was losing revenue as tax was levied only when property is transferred after payment of last instalment. To plug this loophole, “Sale” is deemed even if property is not transferred.
(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;
Missing Element of Simple Sale – Clause (d) cover cases where ownership is not transferred, only right to use is transferred. As ownership is not transferred, there is no “transfer of property” which is one of the element of “Simple Sale”. Hence, such transaction is “deemed as sale”.
(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;
Missing Element of Simple Sale – One of the essential condition of “Simple Sale” is that there has to be two distinct persons. Unincorporated association or body of persons & its members are not two separate persons. Hence transaction between them doesn’t fall within “Simple Sale”. Clause (e) covers such transaction & deems it to be Sale.
(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,
Missing Element of Simple Sale – Another essential element of “Simple Sale” is that essence of contract must be “Sale”. However, clause (f) deems a transaction of supply of food to be sale even if the essence of contract is not sale. For e.g. food served in restaurant is not with the essence of sale. There is always an element of service in it. Even though, dominant nature of transaction is not sale, still VAT is applicable under clause (f).
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;
DISCLAIMER – THE VIEWS EXPRESSED ABOVE ARE PERSONAL INTERPRETATION OF AUTHOR. READER’S PERSONAL DISCRETION IS REQUIRED. AUTHOR TAKES NO PERSONAL RESPONSIBILITY FOR ANY MISTAKES OR OMISSIONS OR MIS INTERPRETATION OF LAW.