MR D. ARVIND, Director ,Indirect Tax Department, Deloitte Haskins & Sells, Mumbai

How did year 2006 pan out for indirect tax in terms of Supreme Court decisions? "A tale of two roads," says Mr D. Arvind, Director in the Indirect Tax Department of Deloitte Haskins & Sells, Mumbai. "One widely travelled, much seen, much heard about and made easy for the weary traveller. The other road is the rough terrain, not so much travelled and not so widely seen and much more exciting to say the least." Though over a period of decades, the apex court has given judgments on various issues, unfortunately the Department has not accepted some of them in their principle, frets Mr Arvind. "Parliamentary changes have given a fresh breath of life for many cases which should have been treated as finally closed. The cases start their journey all over again from the adjudicating authority and finally end up before the apex court."

The year 2006 was a landmark, because the judgments given by the apex court do unshackle a few assumptions, notions and presumptions held by both the Revenue and the trade, says Mr Arvind. Here are his answers to a few questions from Business Line, about the year that was for indirect taxation in the corridors of the Supreme Court.

What is the most noticeable decision of 2006?

The case about indiscriminate issuance of notices, as in Hindustan Poles Corporation. The question before the court was whether the process undertaken by the appellant for bringing into existence the resultant transmission poles amounted to manufacture. Notice had been issued on the ground that the process of welding of electric resistant pipes and tubes of different diameters which are duty paid resulted in a new product.

The apex court held that the process carried out by the appellants did not change the basic identity or original character of the pipes to make it a marketable product leading to manufacture as defined in the Central Excise Act. It held that the burden to prove manufacture is always on the Revenue and that, in the instant case, the Revenue completely failed to provide that the activity carried out by the appellant amount to manufacturing.

It is heartening to note that the apex court has said that before issuing show-cause notices, the Revenue must carefully take into consideration the settled law which has been crystallised by a series of judgments. While the Revenue must seriously endeavour to ensure that all those who ought to pay excise duty do pay, it must refrain from sending indiscriminate show-cause notices without proper application of mind, observed the court. This is absolutely imperative to curb unnecessary and avoidable litigation in courts leading to unnecessary harassment and waste of time of all concerned, including tribunal and courts, said the apex court.

We also had verdicts with a tech edge, as in the case of mobile phones.

Yes, the nature of transaction of mobile connections came up for study in the BSNL case. The issue that was examined by the apex court was about the nature of the transaction of the mobile phone connections. In the matter whether service tax or sales tax should be levied on such transactions, the apex court held that a telephone connection does not allow a subscriber possession of electromagnetic waves and, hence, telecom services was not liable to sales tax.

The apex court also held that whether goods are incorporeal, tangible or intangible, they must be deliverable and held that if there is no deliverable goods in existence there is no transfer of user at all. The apex court held that if the sale of the SIM card is merely incidental to the service being provided and only facilitates the identification of the subscribers, their credit and other details, it would not be assessable to sales tax. A path-breaking judgement, this.

The court has been responding to technological developments.

Yes, the apex court responds to the changing scenario in regard to technological development. Most of the taxing statutes are slightly antiquated. The statues were framed at a time when the technological advancements were practically absent. Take the case of Amritsar Beverages Ltd. The Department had seized the company's documents that were in the form of the cashbook and ledger, and other registers, which were contained in a hard disk.

One of the conditional procedures laid down in the Act was that the book, account, register or document are to be returned after the officer affixes his signature at one or more places. On a writ petition filed by the company before the High Court, the court had applied the principle of literal interpretation and following an earlier precedent issued a mandamus as prayed for.

It was held that the Sales Tax Act was enacted in 1948 when information technology, far from being developed, was unknown. The apex court also held that creative interpretation was resorted to so as to achieve a balance between the age old and rigid laws, on the one hand, and advanced technology, on the other.

The court also held that it uses its own interpretative principles to achieve a balance when Parliament has not responded to the need to amend the statute having regard to the development in the field of science. The apex court pointed out that it had earlier approved the principle of updating construction in a number of decisions. Since literal compliance of the provision was impossible, recourse to scientific method was necessary, said the Supreme Court.

Any other interesting decisions in the realm of sales tax...

The decision in Sunrise Associates should be of interest where it was held that sale of lottery tickets is not sale of goods. The apex court said that the sale of a ticket does not necessarily involve the sale of goods. The court cited the example of a railway ticket which is nothing other than a contract of carriage. The right that a lottery ticket represents would fall squarely within the definition of an actionable claim and would, therefore, be excluded from the definition of goods under the Sale of Goods Act, said the court.

It was also observed that there is no value in the mere right to participate in the draw and the purchaser does not pay for the right to participate. The consideration is paid for the chance to win and there is no distinction between the two rights. The right to participate being an inseparable part of the chance to win is, therefore, part of an actionable claim.

Another offbeat case was Shreyas Papers Private Ltd. The question was whether the purchaser of assets sold by a State Financial Corporation would be liable under the Karnataka Sales Tax for the arrears of sales tax of the concern whose assets have been transferred. The apex court held that foisting the liabilities of the defaulting transferor on the transferee would come into effect only if the ownership of the business is transferred. Ownership of assets is merely an incident rather than a characteristic of business, the court said. Hence the mere transfer of one or more species of the assets does not necessarily bring about the transfer of the ownership of the business for it is much wider than mere ownership of discrete or individual assets.

Were there important lessons for the Revenue, in 2006?

Quite a few. The Revenue should follow the principles laid down, said the Supreme Court, in the Jayaswals Neco Ltd case. The issue was of classification of certain items under relevant heads. The company had been served with a notice on the ground of suppression of facts for getting tax benefit. However, a case with similar facts was before the tribunal wherein the company's stand was accepted on completely similar grounds.

The apex court rightly held, relying on its earlier decision in Birla Corporation Ltd, that the Department having accepted the principles laid down in the earlier case cannot be permitted to take a contra stand in the subsequent case.

The Sandvik Asia Ltd case, which relates to income-tax, is relevant to indirect tax administration too, because of the public justice angle in the verdict. The I-T Department was responsible for making the payment to the assessee that was delayed for 17 years. The moot question in this case was whether the Department was liable to pay compensation for the delay.

Earlier, the High Court had held that there was no such statute confirming that interest should be paid on the interest in case of delay. However, the Supreme Court, in its capacity as the highest authority for dispensing justice, has held otherwise.

The apex court has not only upheld appellant's demand for interest on interest but it has also in its order directed a copy of the order be sent to the Finance Minister to highlight the lethargic and adamant attitude of the erring officials. The order also added that appropriate action be taken against the officers who were responsible for such a delay.

D. Murali