Sale of used Car – Whether taxable under GST?

Introduction

1. Many times businessmen (other than persons providing passenger transportation services) purchase motor vehicles (let us assume it a car) for transportation of its own people. Said car is capitalized in the books of account as capital assets. On purchase of car one must have paid indirect taxes (viz., Excise & VAT) if said purchase was made in the earlier regime.

In the GST regime on purchase of same one must have paid GST including compensation cess, if applicable. In the earlier regime credit of indirect taxes paid on car was not available as it was for self-use in the business. Even in the GST regime as per Sec. 17(5)(a) of the Central Goods & Services Tax (‘CGST’) Act, 2017 credit is not available in respect of said car as it is for self-use in the business. When the car is subsequently sold after use, is GST payable on the same ?

Answering this question is very important because in the earlier regime, VAT of a nominal amount (1% of sale price subject to maximum of INR 2,000) was being paid on sale of used car as per Gujarat Value Added Tax Act, 2003. Hence, nobody disputed the said levy. Excise duty was not payable on the removal as credit was not claimed on purchase. If GST is payable on the same it would result in double taxation as tax @ 28% plus compensation cess will again be payable. Thus, such car would suffer tax twice. One on first supply by dealer and second on subsequent sale by purchaser.

Let us analyze the legal provisions on the issue.

Legal Provisions

2. Levy of GST is on ‘supply’. Sec. 7 of the CGST Act, 2017 defines the term ‘supply’. Relevant portion is reproduced below for ready reference:

“7. (1) For the purposes of this Act, the expression “supply” includes—

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;”

If sale of used car is chargeable to tax, it must be covered under Sec. 7(1)(a). As is seen above only sale made in the course or furtherance of business is covered. Business is defined u/s. 2(17). As the definition is relevant for our analysis the same is reproduced below:

“Sec. 2(17) “business” includes––

(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;
(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;
(f) admission, for a consideration, of persons to any premises;
(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
(h) services provided by a race club by way of totalisator or a licence to book maker in such club ; and
(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;”

As selling used car is not the business of the supplier, the said transaction is not covered under clause (a) of the above definition. Hence, to be covered within the ambit of Sec. 7 sale of used car must be covered under clause (b). Let us now see whether the same can be covered under the said clause.

Legal Reasoning

3. Before the definition of ‘business’ was amended under various State Sales Tax Laws around 1965, only sales made in nature of any trade, commerce, manufacture, profession, vocation, adventure or any sales in connection with or ancillary to such trade, commerce, manufacture, profession, vocation, adventure were taxable. Thus, intention of doing the business measured by volume, frequency, continuity or regularity as well as profit motive was essential to tax a sale transaction. Any sale of goods done without intention of doing a business in those goods or without profit motive was not taxable.

In this context Apex Court in the case of State of Gujarat v. Raipur Manufacturing Co. Ltd.[1967] 19 STC 1 had taken a view that to bring ancillary sales under tax net it must be shown by the revenue that they were made with an intention to do business and earn profit. It relied on its own decision in the case of State Of Andhra Pradesh v. Abdul Bakhi and Bros AIR 1965 SC 531. It was held that when a person in the course of carrying on a business is required to dispose of what may be called his fixed assets or his discarded goods acquired in the course of the business, an inference that he desired to carry on the business of selling his machinery or fixed assets or discarded goods would not ordinarily arise. Hence, the same will not be taxable.

Legislators amended the definition of ‘business’ by providing that any sale made in the nature of any trade, commerce, manufacture, profession, vocation, adventure; whether or not there was intention of making any gain or profit; as well as sales in connection with or incidental or ancillary to such trade, commerce, manufacture, profession, vocation, adventure shall be covered.

First important decision on the issue post the amendment was rendered by the Hon. Supreme Court in the case of State of Tamil Nadu v. Burmah Shell Oil Storage & Distribution Co of India Ltd. [1973] AIR 1045. In this case the respondent under the Factories Act had to supply tea and edibles to its workmen for the Canteen established by it. It also supplied to its distributors calendars, purses and key chains. They also periodically sold items such as scraps, unserviceable oil drums, rubber hoses, jerry cans, rims, etc., Issue before the Court was whether these sales were ‘in connection with or incidental or ancillary’ to the business ?

Before the above case, the Hon. Madras High Court in the case of Deputy Commissioner of Commercial Taxes v. Sri Thirumagal Mills Limited [1967] 20 STC 287 had taken a view that even if by way of amendment to the definition of ‘business’ profit motive is deleted as an ingredient, still the ancillary activity has to be of commercial nature. It should still partake the nature of ‘trade, commerce, manufacture, etc.’ specified in the first limb and only then it can be taxed. Hence, it was held that turnover of fair price shop run for the employees will not be leviable to tax.

The Hon. Andhra Pradesh High Court on the contrary in the case of Hyderabad Asbestos Cement Products Ltd. v. State of Andhra Pradesh [1969] 24 STC 487 (SC) had taken a view that for an ancillary sale to be taxed it is not required that the same must be done with an intention of doing business. Any ancillary sale connected with the business shall be taxable.

The Hon. Supreme Court in the case of Burmah Shell Oil Storage & Distribution Co. of India Ltd.(supra) did not agree with the decision of the Hon. Madras High Court and affirmed the ratio decided by the Hon. Andhra Pradesh High Court.

It held that the Hon. Madras High Court had not paid sufficient attention to word ‘such’ as appearing in clause ‘any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture,adventure or concern’. Hence, it held that after the omission of profit motive, any sale which is ancillary to business whether or not made with an intention to do business of such ancillary goods shall be taxable. The Hon. Supreme Court thus held that once a transaction is covered within the ambit of terms ‘in connection with or incidental or ancillary’ the same shall be taxable, whether or not there was any intention to do business in the commercial sense of ‘business’ in these ancillary goods.

In the given case the Apex Court held that whether sale of scrap such unserviceable oil drums, rubber hoses, jerry cans, etc, is ancillary to the business is a finding of fact. However, it observed that as the respondent was an oil company, all those items were parts of the business activity of trading in oil and, hence, the same were taxable. In respect of marketing items like calendars, wallets, etc. it was observed that such goods were given to dealers for increasing the sales. Hence, the same were also ancillary to business. With regard to canteen sales it was observed that Government Order specifically provided for exemption to sales made by canteen and, hence, the same must be considered by lower authorities.

In the above connection attention is also invited to another decision of the Hon. Supreme Court in the case of State Of Tamil Nadu v. Binny Ltd. AIR 1980 SC 2038 where the issue was whether sale by canteen is ‘incidental’ to business ? It was held that such sale is indeed incidental to business. Relevant portion of judgment is reproduced below for ready reference (emphasis supplied):

“It is indeed difficult to see how it can at all be said that the activity of selling provisions to the workmen in the Store was not incidental to the business of manufacture of textiles in the factory. The sales which were effected in the Store were to the workmen employed in the factory where textiles were being manufactured and the provision of this facility to the workmen was certainly incidental to the carrying on the business of manufacture of textiles. This view finds support from the decision of this Court in case of Royal Talkies Hyderabad vs. Employees State Insurance Corporation, where the question was as to whether a canteen maintained by a cinema owner in the premises of the cinema could be said to be incidental to the business of running the cinema. Krishna Iyer, J., speaking on behalf of the Court, pointed out that “a thing is incidental to another if it merely appertains to something else as primary. Surely, such work should not be extraneous or contrary to the purpose of the establishment but need not be integral to it either.” Applying this test the Court held that it was impossible to contend that “a canteen or cycle stand or cinema magazine booth is not even incidental to the purpose of the theatre. The cinema goers ordinarily find such work an advantage, a facility an amenity and sometimes a necessity. All that the statute requires is that the work should not be irrelevant to the purpose of the establishment.” Now if a canteen maintained by a cinema owner for the benefit of cinema goers can be regarded as incidental to the purpose of the cinema theatre which is to carry on the business of exhibiting films in the theatre, we fail to see how a Store run by the owner of a textile undertaking for sale of provisions to the workman employee in the factory can be said to be anything other than incidental to the business of manufacture of textiles. We are clearly of the view that the activity of selling provision to workmen in the Store was incidental to the business of manufacture of textiles and the sales were, therefore, transactions falling within the definition of ‘business’ in Clause (ii) of Section 2(d).”

The Apex Court in the above case has interpreted the word ‘incidental’ in a very broad sense. Any transaction which pertains to something else which is primary shall be regarded as incidental. It need not be integral to it.

To summarize, the principle laid by above referred cases, once it is factually proved that a sale is ‘in connection with, incidental to or ancillary’ to business the same shall be chargeable to tax despite the fact that there was no intention to make such sales in the commercial sense of ‘business’, i.e., transaction is invested with commercial character. For such ancillary sales of goods it would no more be necessary to establish “intention to carry on business” in those goods.

Hence, if sale of used car is ‘in connection with, incidental to or ancillary’ to business the same shall be chargeable to tax.

On the issue of sale of used car by a dealer carrying on business of manufacturing, selling and supplying of chemicals the Hon. Bombay High Court in the case of Morarji Brothers (I&E) (P.) Ltd. v. State of Maharashtra [1995] 99 STC 117 had an occasion to decide whether the same amounted to a transaction ‘in connection with or incidental or ancillary’ to business.?

The Hon. Bombay High Court relied on the decision of the apex Court in the case of Raipur Manufacturing Co. Ltd. (supra). As stated before, said decision was rendered before the definition of ‘business’ was amended to exclude profit motive. The Bombay High Court observed that, though the main ratio laid down in the said decision that incidental sale of goods can be brought to tax only if done with an intention of doing business in those goods is not applicable in view of amendment to the definition, still the fact that incidental sales of “unserviceable or discarded” goods intended only for reduction of the space and to save accommodation were not so integrated with (or connected with) the main business even if they were of considerable volume and frequency.

Hence the Hon. Bombay High Court held that sale of three used motor cars by the assessee, who was a dealer carrying on business of manufacturing, selling and supplying of chemicals, did not amount to sale by a dealer within the meaning of section 3, read with clauses (11) and (5A) of section 2 of the Bombay Sales Tax Act, 1959 as it was not ‘in connection with or incidental to or ancillary to’ the business of supplying chemicals.

Relevant portion of the judgment is reproduced below for ready reference:

“Sale of used or discarded cars by the assessee in the present case would be governed by proposition No. 7 emerging from decision of Supreme Court in Raipur Manufacturing Co. [1967] 19 STC 1 which is reproduced below:

‘7. Where a person in the course of carrying on a business is required to dispose of what may be called his fixed assets or his discarded goods acquired in the course of his business, an inference that he desired to carry on the business of selling his fixed assets or discarded goods would not ordinarily arise.’

Following the same, such sales cannot be held to be part of or incident of the main business of the assessee, which in the present case comprised of manufacture and sale of chemicals. No sales tax can,therefore, be levied under the Act on such sales.

** ** **

This opinion of ours is fully supported by the decision of the same High Court in Commissioner of Sales Tax v. Sajjad Hussain Automotive Service [1991] 82 STC 335 where the sales of a second-hand car by a dealer in motor spirit and lubricants was held to be not covered by the term “business” for the purposes of taxation under the Madhya Pradesh General Sales Tax Act, 1958.

** ** **

The legislative intent of the Sales Tax Act and the charging section, as stated above, is not to levy tax on all sales or purchases of taxable goods made by a dealer. It is only the sales or purchases effected by persons who carry on business, within the meaning of clause (5A) of section 2 of the Act, of buying or selling such goods that are liable to tax under the Act. Had the legislative intent been otherwise, it was not necessary to provide in the charging section that tax would be payable only by “a dealer” and to define the expression “dealer” as a person who carries on the “business of buying or selling goods in the State” and to further define the expression“business” for that purpose and to amend the same from time to time with a view to widening the ambit thereof. All this would be rendered redundant, if “all purchases or sales” of taxable goods by a dealer, per se, are held to be taxable under the Act. Had it been so, section 3 would have provided that every person who is engaged in business and whose turnover of sales and purchases during the given period exceed the specified limits, would be liable to pay tax on the turnover of all sales or purchases made by him.”

Next important decision on the issue was rendered by the Hon. Delhi High Court in the case of Panacea Biotech Ltd. v. Commissioner of Trade [2013] 52 NTN DX 171. In this case again the issue was whether transaction of sale of used car was covered in the definition of ‘business’? The issue was raised under the Delhi Sales Tax Act, 1975 which had pari materia definition of ‘business’ with the CGST Act, 2017 as far as clauses (a) & (b) are concerned which are relevant for present discussion.

Reference was made to Concise Oxford English Dictionary (10th ed.) wherein the word ‘ancillary’ has been defined as something providing support to the primary activities of an organization; something which is additional or subsidiary. Reliance was also placed on the decision of the Hon. Bombay High Court in the case of Morarji Brothers (I&E) (P.) Ltd. (supra).

It was held that selling of used cars cannot by any stretch of the imagination be characterized as “ancillary” or incidental to the business of a pharmaceutical company. It was not shown that the cars were of a special character, e.g., air conditioned vehicles especially designed to store and ferry pharmacy products. They were purchased for use of company’s employees and executives for office purposes.

It was also observed that at the stage of purchase, they had suffered sales tax, which the assessee, as buyer, was bound to pay. However, the assessee never held them for the purpose of sale and purchase, but for using them. After their use, having regard to lapse of time, and their wear and tear, the assessee decided to replace them. These cars were then sold. Their sales, in a sense, are twice removed from the business of the assessee. They could not be called “incidental” or “ancillary” to the manufacture and sale of pharmaceutical products, which the assessee was engaged in. Hence, the sale of used car would not be subjected to tax.

Later on, under the Delhi Value Added Tax (‘Delhi VAT’) Act, 2004 definition of ‘business’ u/s. 2(d) contained an Explanation which provided that any transaction of sale or purchase of capital assets pertaining to such service, trade, commerce, manufacture, adventure or concern shall be deemed to be business. However, an exemption from tax on sale of such capital assets was also provided in cases where input tax credit has not been claimed on purchase of such capital assets and they were not used exclusively in making non-taxable sales.

In this context, the Hon. Delhi High Court in the case of Anand Decors v. Commissioner of Trade & Taxes [2015] 53 taxmann.com 235 (Delhi) was called upon to decide whether the sale of used car, without availing of input tax credit, by a trader dealing in other commodities will be subjected to tax.

It was held that because of an Explanation to the definition of ‘business’, providing that the sale of capital assets pertaining to trade shall be deemed to be regarded as business, sale of used car shall be covered. However, in view of an exemption provided, in law, where input tax credit has not been availed on the car and the same has not been used exclusively in business of sale of non-taxable goods, the sale of used car shall not be taxable.

Conclusion

From the above analysis we can conclude that element of profit motive or volume, frequency, continuity or regularity is not required to tax a transaction ‘in connection with or incidental or ancillary to’ any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity.

Unlike Delhi VAT Act, 2004, definition of business under Sec. 2(17) of the CGST Act, 2017 does not contain a deeming Explanation providing that sale of all capital goods pertaining to business shall be covered, even though the same may not be ‘in connection with or incidental or ancillary to’ business. Whether a transaction is ‘in connection with or incidental or ancillary to’ business is to be determined on the basis of facts.

In case of sale of used car by a person dealing in other commodities, the Hon. Bombay High Court in the case of Morarji Brothers (I&E) Pvt. Ltd. (supra) as well as the Hon. Delhi High Court in the case of Panacea Biotech Ltd. (supra) has held that the same will not be regarded as sale ‘in connection with or incidental or ancillary to’ business and, hence, shall not be taxable. As definition of ‘business’ under the CGST Act, 2017 is pari materia to the extent of clauses under discussion, ratio of both the judgments shall squarely apply and, hence, GST shall not be paid on sale of used car. Even if viewed from the principle of equity, revenue has already got tax on sale of car once. Taxing the same again on resale after use will lead to double taxation.

 

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