1. By means of this writ petition, the petitioners have challenged the action on the part of respondents No. 1 to 5 regarding deduction of tax at source under Meghalaya Value Added Tax Act, 2003.
2. Heard learned counsel for the parties at length and perused papers and record.
3. Brief facts of the case are that petitioner No. 1 M/s Tata Consultancy Services Ltd. is a pioneer consultancy company, engaged in providing consultancy services in the field of information and technology to its clients including the Government Departments and Public Sector undertakings. For rendering such service, the petitioner No. 1 is liable to pay Service Tax in the light of Section 65 (105) of Chapter V of the Finance Act, 1994, for which it is registered with the Government of India (Registration No. AAACR4849RST011 under Section 69 of Finance Act, 1994 issued by the Superintendent (Registration), Service Tax, Division – II, Kolkata.
4. Respondent No. 4 Meghalaya Information Technology Society (MITS), Shillong through Commissioner & Secretary to the Govt. of Meghalaya entered into an Agreement dated 20.08.2010 with the petitioner No. 1 for providing network services throughout the State of Meghalaya. The said Agreement was entered after Govt. of Meghalaya proposed to set up Meghalaya State Wide Area Network (MSWAN) to modernize the communication setup of Government to implement e-Governance initiatives, improve administrative effectiveness and efficiency and accelerate the overall development of the State through improved Government interfaces. The implementation of MSWAN Project was awarded to the petitioner by respondent No. 4 vide aforesaid Agreement dated 20.08.2010 on Build, Own, Operate, Transfer (BOOT) basis. The implementation of MSWAN on BOOT Basis was required to be done in five years to provide Data connectivity and Voice Video services to various Offices of Government of Meghalaya for which the Government was required to pay minimum guaranteed amount on quarterly basis at the end of each quarter to the petitioner No. 1 who is shown as operator in the Agreement.
5. It is pleaded by the petitioners that the Agreement entered between the petitioner No. 1 and respondent No. 4 clearly provides that the petitioner No. 1 will have all control and possession of the equipments necessary for the operation of the network during the contractual period (five years) and the petitioner will transfer all equipments at a nominal value of Re. 1/- to the respondent No. 4. Apart from this, the petitioner No. 1 was required to provide training to the personnel of Government of Meghalaya and to deploy qualified manpower for implementation and operation of the network to keep the project operational all 365 days of the year and 24 hours a day except at the Block Headquarters level. Petitioner No. 1 is also responsible for the upkeep and maintenance of the premises at all levels like State Headquarters, District level HQs etc.
6. It is also stated in the writ petition that in terms of the Agreement since five years period has not expired as such petitioner No. 1 is still owner of all the equipments, cables etc. by which MSWAN is made operational under BOOT basis. As such neither there is any 'works contract' nor any 'transfer' of right to use 'goods' for any of the purposes of Sub-Clause (b) and (d) of Clause (xxxii) of Section 2 of Meghalaya Value Added Tax, 2003 (MVAT Act). After importing necessary equipments and components, petitioners are rendering services to the State of Meghalaya in terms of the Agreement, after Final Acceptance Test Certificate for MSWAN was issued by respondent No. 4 on 29.06.2011. The period of five years under the Agreement for transfer of system would expire in June, 2016, whereafter, the system along with equipments will be transferred to respondent No. 4 for Re. 1/- only.
7. Since the petitioners are registered with the Service Tax Department of Government of India, they are filing the returns in Form ST-3 under Section 70 of Finance Act, 1994 (as amended) and making payment of Service Tax. It is further stated that for the financial year 2011-2012 Rs. 35,67,807/- was paid to respondent No. 6. Similarly, for the financial year 2012-2013, the Service Tax amounting to Rs. 14,92,001.31p was paid to respondent No. 6 (Commissioner of Service Tax).
8. To import networking IT components and equipments for MSWAN Project in the State of Meghalaya, Assistant Commissioner of Taxes, Meghalaya, vide letter No. CTA(EB)38/10 dated 01.09.2010 addressed to Superintendent of Taxes (respondent No. 3) allowed transportation of materials by petitioner No. 1, for own use (not for sale). Similar permissions were granted vide letters dated 01.12.2010, 09.12.2010 and 24.01.2011, as the respondent No. 2 was satisfied with the import was being made by the petitioners for their own use under the contract with the Government.
9. However, Assistant Commissioner of Taxes, Meghalaya, vide his letter No. CTA-(EB)/13/10/185 dated 07.03.2011 asked the respondent No. 4 to deduct tax at source from the bills of the petitioners. When the petitioner No. 1 received notice, he submitted an application for no deduction certificate before respondent No. 2 on the ground that no transfer of property in goods had taken place, no transfer of right to use goods was involved as personnel of petitioner No. 1 was still controlling the entire operation. But respondent No. 2 (Commissioner of Taxes, Meghalaya) vide his letter No. CTAS-5/2011/1813 dated 07.12.2011 rejected the application for issuance of certificate of non- liability and stopped issuing special permission to the petitioners to import items for the project.
10. On this, the petitioners filed WP(C) No. 986 of 2012 before the Gauhati High Court, which was disposed of vide order dated 12.03.2012 without deciding the issue as to the liability of payment of VAT or tax deductable at source with the following operative portions in the order:
'It is well settled that under the provisions of sale tax law, deduction of tax at source is permissible with reference to prima facie taxable value of the transaction and deduction of tax at source cannot be de hors the tax liability of a dealer. State legislature cannot allow deduction from bills de hors the same. Reference may be made to law laid down in Steel Authority of India vs. State of Orissa, AIR 2000 SC 946 and Rapti Commission Agency vs. State of UP (2006)6 SCC 522. In view of this legal position, learned Additional Advocate General has stated that there was no proposal to make deduction of tax at source from the entire transaction value but only from such value as is found to be tentative taxable turnover. In view of there being no dispute on principle, no further issue needs to be gone into at this stage as issues raised by the petitioner can be gone into in appropriate proceedings. We dispose of this petition with a direction that respondent No. 4 may determine prima facie taxable turnover, if any, in the transaction involved and make such deduction as appears to be the tax liability of the petitioner. This may be done within one month from the date of receipt of this order and after considering the viewpoint of the petitioner. The tax so deducted will be paid over to the concerned department and will abide by the assessment in accordance with the provisions relating to the assessment of tax liability. Since huge amount is said to be involved, such assessment may be finalized by the assessing authority expeditiously, preferably within three months from the date of deduction of tax.'
11. Consequent to the above order, the petitioners submitted an application dated 30.03.2012 before respondent No. 4 to release the payment without deducting tax at source under MVAT Act. The Respondent No. 2 (Commissioner of Taxes, VAT), vide letter dated 04.04.2012 asked respondent No. 4 to follow the directions given in the judgment and order passed by the Gauhati High Court specifically instructed MITS to bifurcate the amount involved in the supply of materials by ascertaining whether the petitioners supplied the materials free of cost or not. It was also mentioned in the said letter that if for the materials used or supplied in the service, the Government had paid cost, then only tax at source would be deducted @ 13.5%. It was also stated in the said letter dated 04.04.2012 by the respondent No. 2 that in respect of amount of labour or services involved in execution of the project, no deduction of tax at source was to be made under MVAT Act, 2003.
12. But respondent No. 4 (MITS) vide his letter No. ITR/17/2012/70 dated 21.06.2012 informed the petitioners of its decision to deduct tax at source on CAPEX portion of the payment received under the Agreement and also directed the petitioners to raise its invoice specifying CAPEX and OPEX parts for each items. Apart from this, respondent No. 4 vide his letter No.CTAS-5/2011/750 dated 03.07.2012 directed the petitioners to apply for registration under MVAT Act, 2003 and Central Sales Tax Act, 1956. In response to above letter, the petitioners vide letter dated 17.07.2012 submitted that though the petitioners are not liable to pay tax under MVAT Act, 2003 but under protest without prejudice to their rights, they are applying for registration under MVAT Act, 2003 and Central Sales Tax Act, 1956. Respondent No. 4, vide his letter No. MITS.7/2012/Vol-III/5 dated 08.08.2012 instructed the petitioners to raise their invoices for each QGR clearly specifying CAPEX and OPEX parts for each item. According to the petitioners, the same was not possible as CAPEX and OPEX parts were not separable for the reason that the estimated figures were in respect of combined activities viz. supply, installation, operation, maintenance and provisions of services etc. When Request for Proposals (RFP) was furnished to this effect by the petitioners vide letter dated 03.09.2012, respondent No. 3 intimated the petitioners to show cause within twenty one days as to why the application for registration be not rejected. The petitioners submitted reply dated 18.09.2012 in response to show cause notice stating that the project is running on Build, Own, Operate and Transfer basis (BOOT basis) and the transfer will take only in the fifth year. Petitioners further replied that they cannot be deprived to import further equipments/parts required for service deliveries. And they filed the present petition challenging the action taken by respondents No. 1 to 5 as illegal.
13. On behalf of respondents No. 1,2 and 3, a counter affidavit has been filed, in which it has been stated that the petitioners were refused certificate of non-liability to pay tax on the ground that the petitioner No. 1 is not only rendering the service while executing contract but also engaged in the supply of taxable materials in execution of the work. It is further stated on behalf of the answering respondents that the Government of Meghalaya through Meghalaya Information and Technology Society (MITS) is required to pay the cost of materials used in the service. It is further stated in the counter affidavit that Dr. BP Todi, Addl. Advocate General, whose opinion was sought in the matter advised the State Government and opined that the petitioners is 'dealer' within the meaning of Section 2 (xvi) of Meghalaya Value Added Tax Act, 2003. He (Dr. Todi) further opined that since gross turnover during the year exceeds the prescribed amount as such under Section 2 (xxxii) of the above Act, the petitioners are required to seek registration. The Addl. Advocate General (Dr. Todi) further opined that it will not be proper to issue certificate of no tax liability to the petitioners. Referring to Section 2(xxxii), it is stated in the counter affidavit that the transaction relating to the imported equipments is covered by definition of sale on which the petitioners are liable to pay tax. It is further stated on behalf of respondents No. 1 to 3 that merely for the reason that the petitioners are making payment of service tax, it cannot be said that they are exonerated from making payment of value added tax.
14. In the affidavit-in-reply of respondents No. 1 to 3, the petitioners have reiterated the averments made in the writ petition and relied on the principle of law laid down in Builders Association of India and Ors. Vs Union of India and Ors, (1989) 2 SCC 645 and Imagic Creative (P) Ltd. vs Commissioner of Commercial Taxes and Ors, (2008) 2 SCC 614.
15. In its counter affidavit, respondent No. 6 has only stated that the writ petition is liable to be dismissed in respect of alternative relief in Clause (f) made in the prayer clause regarding refund of service tax.
16. We have considered the submissions of rival parties on the pleadings mentioned above.
17. Admittedly, the Agreement dated 20.08.2010 was executed between the petitioner No. 1 and respondent No. 4 (MITS) for implementation of MSWAN project on Build, Own, Operate and Transfer basis (BOOT basis) to modernize the communication set-up for Government and implement e-Governance initiatives, improve administrative effectiveness and efficiency and accelerate the overall development of the State through improved Government interfaces by linking Government Offices at State Headquarters (HQs) to District and Sub-Divisional Headquarters. It is also not disputed that under the Agreement, the petitioners were required to provide data connectivity, voice and video services to the various Offices of the State of Meghalaya for five years for which the Government was required to pay minimum guaranteed amount on quarterly basis. It is also not disputed that at the end of five years, the petitioners were required to transfer the entire system with equipments to the State Government on nominal payment of Re. 1. The dispute relates as to the fact whether under the aforesaid project, the petitioners are simply service provider or they are making project for sale of their equipments under the works contract.
18. In this connection, first of all we would like to quote the relevant clauses of Agreement executed between the Petitioners and respondent No. 4. Para 1 of the Agreement reads as under : 'Government of Meghalaya (GoM) proposes to set up a Meghalaya State Wide Area Network (MSWAN) to modernize the communication set up of Government to implement e-Governance initiatives, improve administrative effectiveness and efficiency, and accelerate the overall development of the State through improved Government interfaces. The key applications envisaged on the network are Data, Voice Communications, Video Conferencing, Value Added Services. Help Desk for MSWAN users etc. GoM intends to set up MSWAN to link Government Offices at State Head Quarter, Shillong (herein after called as SHQ), District Head Quarter (herein after referred as DHQ), Sub-Division Headquarter (herein after referred as SDHQ) and Block Headquarter (herein after referred as BHQ) with each other. The MSWAN would be implemented on Build-Own-Operate and Transfer (BOOT) basis spread over a period of five (5) years to provide Data connectivity, Voice and Video services to various offices of GoM and other locations as identified by the Govt. of Meghalaya. The MSWAN will have a suitable topology, use state-of-the art technologies and have capability/flexibility to expand/upgrade to cover all parts of the State. There are 7 district headquarters, 8 sub-division headquarters and 39 block headquarters (refer Annexure-II for details). The envisaged initial bandwidth for MSWAN is 2 Mbps (upgradable) for connecting SHQ with DHQ and DHQs with SDHQs/BHQs. All Government departments are envisaged to be connected with MSWAN horizontally. Different departments of GoM have implemented or are implementing isolated local area networks and MSWAN shall have provision for connecting them for the required services. MSWAN shall also provide single point internet connectivity through 4 Mbps gateway at SHQ, which may be increased progressively to 8 Mbps or more any time during the period of operation.' Paragraph 2.9 of the Agreement reads as under:
'2.9. 'BOOT Model' the services as required by the Purchases are specified in Annexure-I (Technical and Operational Requirements) of the Agreement. The bidder shall carry out the activities as mentioned below from 1) to 4) and purchaser will release guaranteed payments against the services as prescribed in service level agreement.
1) Procurement, installation and commissioning of the equipment by the bidder.
2) Procurement of the transmission /connecting media on behalf of the Purchaser.
3) Integration of the network – The bidder has to offer the same as part of implementation activity.
4) Operation, maintenance and upgradation of equipment/network by executing a Service Level Agreement (SLA) between bidder and GoM for Operation and Maintenance for the entire period of contract as in integral part of supplies and implementation.
As vendor will be responsible for smooth functioning of network, availability of spares will be taken care of by vendor to maintain the guaranteed uptime.' Paragraph 9.4 of the Agreement is most important which reads as under:
'9.4 No title to the equipment The Operator and GoM/MITS agree that GoM/MITS shall have no title to any of the equipment made available for delivery of services by the Operator during the period of the Agreement.
After five years, it shall be transferred to Gom/MITS.' Paragraphs 13.5 and 13.6, other two important clauses in the Agreement provide as under : '13.5 Properties and Facilities The Operator shall assume full responsibility and liability for the maintenance and operation of its properties and facilities and shall indemnify and hold MITS harmless from all liability and expense on account of any and all damages, claims or actions, including injury to and death of persons, arising from any act, accident or omission in connection with or arising out of the installation, presence, maintenance and operation of properties and facilities of the Operator. 13.6 Control and Possession. The Operator shall be deemed to be in control and possession of the equipment necessary for the proper and normal operation of the MSWAN.' Next relevant para No. 17.3 in the Agreement reads as under:
'17.3 – It shall be the responsibility of the Operator to provide Internet Connectivity from 4 Mbps upto 8 Mbps at SHQ as per requirement during the currency of agreement. The payment of such internet access and BW charges as levied by ISP shall be borne by MITS.' Lastly, para 20.3 in the Agreement which relates to transfer provides as under:
'20.3 Transfer The Operator shall Transfer in good and working condition all equipment (without any liability) necessary for the proper and normal operation of the MSWAN including but not limited to all constructed sites, laid cables, software, technical designs, technical and operational manuals and also all electrical, civil and mechanical works at SHQ, all DHQs, all SDHQs/BHQs and all co-located & remote offices related to the MSWAN to MITS or its nominee a nominal/notional cost of Re 1 at the end of the agreement period.
19. From the above clauses mentioned in the Agreement, we are of the view that since under the BOOT basis, the petitioners are still not only in control and possession of the equipments imported, but also they are the owner of the same as such neither there is sale nor transfer nor supply of materials nor transfer of rights of goods can be said to have taken place. That being so, import of equipments to provide service under the Agreement, to the State Government, in the present case, cannot be said to be 'tax on sale or purchase of goods' as defined in Clause 29-A of Article 366 of the Constitution of India.
20. Attention of this Court is drawn by the learned Advocate General to Sub-Clause (d) of Clause (29-A) of Article 366 of Constitution of India and it is submitted that since the petitioners have allowed the use of equipments to the State Government as such import of equipments is covered by the definition of sale.
21. We have considered the above submissions and we are of the view that Sub-Clause (d) of Clause (29-A) of Article 366 of the Constitution provides transfer of right to use any goods for any purposes is inclusive in the expression 'tax on sale or purchase of goods' but in the present case, since the personnel of the petitioners company have not handed over their possession and control over the equipments for providing services to MSWAN as such said sub-clause cannot be said to have been attracted.
22. The above view taken by us gets supported from the principle of law laid down by the Apex Court in State of AP vs. Rastriya Ispat Nigam Ltd. (2002) 3 SCC 314. 23. On behalf of the petitioners, attention of this Court is drawn to the case of Imagic Creative (P) Ltd vs. Commissioner of Commercial Taxes (2008) 2 SCC 614, in which the Apex Court in second part of para 29 has observed as under : 'A distinction must be borne in mind between an indivisible contract and a composite contract. If in a contract, an element to provide service is contained, the purport and object for which the Constitution had to be amended and Clause (29-A) had to be inserted in Article 366, must be kept in mind.'
24. In State of UP vs Union of India (2003)3 SCC 239, the Apex Court in para 34 has observed as under:
'34. In regard to sale of goods where the service is incidental, the principle of non-separability will apply in the absence of a specified valid statutory provision; for example, in a restaurant/hotel, where food or other articles are sold, the supply of service like providing cutlery-washing liquid, towels, music etc., is merely incidental and it would not be permissible treat such service as a transfer of right to use the goods for the purpose of taxation under the relevant Sales Tax Act. Where, however, the supply of service as well as supply of goods are prominent objectives and they have been clubbed together under a composite contract, it would be possible to treat them separately; for example, where in a holiday package, transportation, boarding and lodging are separately treated, it would be possible to assess them separately, though covered under the same contract.'
25. We have also
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taken note of law laid down by the Apex Court in Bharat Sanchar Nigam Ltd. vs Union of India (2006) 3 SCC 1, in which it has been held that nature of the transaction involved in providing telephone communication may be composite transaction of service and sale and it is possible for States to tax the sale element, provided there is a discernable sale and the 'dominant intention' test is satisfied. In the present case, under the BOOT basis neither any equipments are yet transferred to the State of Meghalaya nor they have control and possession over them as it is apparent from the clauses of the Agreement quoted above, as such it cannot be said that the petitioners were liable to pay tax under Meghalaya Value Added Tax Act, 2003 in respect of goods which the petitioners are still owning and they are in possession thereof. 26. In Builders Association of India vs Union of India (1989) 2 SCC 645, the Apex Court in paragraph 32 has explained the object of insertion of Clause (29-A) under Article 366 of the Constitution of India and while doing so it has observed that : ' it does not say that a tax on sale or purchase of goods included a tax on the amount paid for execution of a works contract.' 27. For the reason as discussed above, we are of the view that the action taken by the respondents No. 1 to 5 regarding tax deduction at source under Meghalaya Value Added Tax Act, 2003 against the petitioners who are service providers and who have not transferred the equipments to the respondents, is illegal and it is made clear that the petitioners are not liable to make payment of sales tax on the equipments unless the same are transferred under the Agreement executed between the petitioners and respondent No. 4. It is apparent to mention here as per the terms and agreement, that the petitioners are still in possession and control of the equipments by which the service MSWAN is being provided to the State of Meghalaya. 28. Accordingly, this writ petition is disposed of allowing the relief No.(a) of prayer clause of the writ petition and it is declared that the action on the part of respondents No. 1 to 5 in deducting tax at source from CAPWX portion of the quarterly guaranteed revenue charges payable to the petitioners in respect of services rendered under the Agreement dated 20.08.2010, under Section 106 of MVAT Act, 2003, is illegal. The writ petition also stands allowed in respect of prayer clause (b) and (c). 29. No order as to costs.