Payments subjected to Service Tax cannot be Recharacterized as Sale of Goods to Levy VAT or Sales Tax: Allahabad HC [Read Order]

In a significant ruling a Single Bench of the Allahabad High Court held that the payments subjected to service tax cannot be recharacterized as sale of goods to levy value added tax ( VAT ) or sales tax.

In the instant case, first appellate authority had concluded that the dealer/respondent had sold his brand name/title under the franchise agreement, and since it is to be considered as a sale, therefore, Value Added Tax has to be levied on it.

The Standing Counsel appearing on behalf of the revisionist submitted that even if service tax was paid, it does not absolve the liability under the UPVAT Act, as Value Added Tax and Service Tax were separate and distinct taxation regimes before the introduction of the Goods and Services Tax Act, 2017. Further, the term ‘sale’ as defined under Section 2 (ac) of the UPVAT Act includes a 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.

The counsel for the respondent-assessee contended that the service tax at a rate of 15% has already been paid by the respondent on the amount of royalty received by them from the licensees under the franchise agreement. In view of this fact, no intention to evade tax on the part of the respondent can be inferred. Finally, the counsel argued that Service Tax and VAT are mutually exclusive levies and a single consideration cannot be subjected to both the levies.

The Single Bench of Justice Shekhar B. Saraf observed that “It is clear from the factual matrix of the instant case that the respondent herein had received royalty amount from various dealers under the franchise agreement and service tax has been duly paid by it on the same. If these payments have been subjected to service tax, they cannot be recharacterized as the sale of goods to levy VAT or sales tax. The prevention of double taxation is a fundamental principle of tax law. Double taxation occurs when the same income or transaction is taxed more than once by different tax authorities or under different tax regimes.”

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates