SODEXO SVC INDIA PVT. LTD. Vs. STATE OF MAHARASHTRA AND ORS.
Supreme Court of India (Division Bench (DB)- Two Judge)
Appeal (Civil), 4385-4386 of 2015, Judgment Date: Dec 09, 2015
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 4385-4386 OF 2015
SODEXO SVC INDIA PRIVATE LIMITED …..APPELLANT
VERSUS
STATE OF MAHARASHTRA & ORS. …..RESPONDENTS
J U D G M E N T
A.K. SIKRI, J.
The appellant company is conducting the business of
providing pre-printed meal vouchers which are given the nomenclature of
'Sodexo Meal Vouchers'. As per the appellant, it enters into contracts
with its customers for issuing the said vouchers. These customers are
establishments/companies having number of employees on their rolls. They
provide food/ meals and other items to their employees up to a certain
amount. It is for this purpose that the agreement is entered into by such
establishments/companies with the appellant for issuing the said vouchers.
After receiving these vouchers for a particular denomination, some are
distributed by the companies to its employees. For utilisation of these
vouchers by such employees, the appellant has made arrangements with
various restaurants, departmental stores, shops, etc. (hereinafter referred
to as 'affiliates'). From these affiliates, the employees who are issued
the vouchers can procure the food and other items on presentation of the
said vouchers. The affiliates, after receiving the said vouchers, present
the same to the appellant and get reimbursement of the face value of those
vouchers after deduction of service charge payable by the affiliates to the
appellant as per their mutual arrangement. In this manner, the appellant,
by issuing these vouchers to its customers, gets its service charge from
the said companies. Likewise, the appellant also takes specified service
charges from its affiliates. A diagramatic representation of the business
model of the appellant is as under:
On the basis of the aforesaid arrangement made by the appellant with its
customers as well as its affiliates, the question that has arisen for
consideration is as to whether these vouchers can be treated as 'goods' for
the purpose of levy of Octroi or Local Body Tax (LBT) or the aforesaid
activity only amounts to rendering service by the appellant. The issue has
to be examined as per the relevant provisions of the Maharashtra Municipal
Corporation Act [Act No. LIX of 1949] under which the Municipal Corporation
is entitled to levy and collect Octroi or LBT.
Before we advert to the relevant provisions of the Act, it would be
worthwhile to mention that in order to carry on the aforesaid business, the
appellant is compulsorily required to obtain necessary approval/
authorisation from the Reserve Bank of India (RBI), which requirement is
spelt out from Section 7 of the Payment and Settlement Systems Act, 2007.
The appellant has been granted a Certificate of Authorisation by the RBI to
operate a payment system for the issuance of Sodexo Meal Vouchers in the
form of 'Paper Based Vouchers' under the aforesaid provision.
The Payment and Settlement Systems Act, 2007 provides for the regulation
and supervision of payment systems in India and designates RBI as the
authority for that purpose and all related matters. Under Section 2(1)(i)
of the Payment and Settlement Systems Act, 2007, a 'payment system' is
defined as a system that enables payment to be effected between a payer and
a beneficiary, involving clearing, payment or settlement service or all of
them but does not include a stock exchange. The appellant is also required
to adhere to the Pre-paid Issuance and Operation of the Payments
Instruments in India (Reserve Bank) Directions, 2009 issued under the
Payment and Settlement Systems Act, 2007 and Revised Consolidated
Guidelines, 2014. Thereunder, 'pre-paid payment instruments' are defined
as payment instruments that facilitate purchase of goods and services
against the value stored on such installments. The value stored on such
instruments represents the value paid for by the holders by ash, by debit
to a bank account, or by credit card. The amount so paid by the customers
is always kept in escrow account and is used strictly only for settlement
of vouchers and never accounted for or used as income in the hands of the
appellant. Accordingly, the Certificate issued to the appellant contains
the following terms and conditions:
“The Payment System Provider shall adhere to the provisions of the Payment
and Settlement Systems Act, 2007, regulations issued thereunder and the
directions/guidelines issued by the Reserve Bank of India.
The authorization is only for issue of meal vouchers and gift vouchers in
the form of 'Paper based vouchers' and 'Smartcard' or 'Smart Meal Card' and
subject to adherence of the 'Policy Guidelines for issuance and operation
of Pre-paid Payment Instruments in India' (unless specific relaxation has
been permitted by the RBI)
Sodexo shall adhere to the provisions of the prevention of Money Laundering
Act and ruled framed thereunder. Further, the guidelines on Know Your
Customer/Anti-Money Laundering/ Combating Financing of Terrorism issued by
the RBI to Banks, from time to time shall apply mutatis mutandis to the
entity.”
Thus, as per the aforesaid authorisation by the RBI, the business operation
that is carried out by the appellant, has the following essential features:
(i) the payment system operated by the appellant involves issuance of
vouchers having a face value (meal and gift vouchers) to the customers;
(ii) customers grant said vouchers to their employees (beneficiaries);
(iii) the employees use the vouchers to obtain/pay for food, meal or
goods;
(iv) vouchers can only be used in an affiliated network of restaurants and
shops (affiliates/redeemers);
(v) the affiliated restaurant/shop having delivered the food/meal/ good,
receives the voucher and turns it to the appellant who issued it for
reimbursement of the face value (redemption); and
(vi) when the vouchers are redeemed, the appellant reimburses to the
affiliate/redeemer the face value of the voucher and retains a service fee
in order to compensate for the attractiveness of the system which has
benefited to the affiliate's business. The appellant pays service tax on
such service fee charged.
Having taken note of the nature of business operation of the appellant
herein and the manner the same is statutorily regulated by the Payments and
Settlement Systems Act, 2007 and the Rules framed thereunder, we revert to
the issue that has to be answered in the present case, namely, whether
these Sodexo Meal Vouchers are goods within the meaning of Section 2(25) of
the Act. For this purpose, it would be imperative to take note of the
definition of goods appearing in the aforesaid provision as well as some
other relevant provisions of this Act.
Section 2(25) of the Act provides the definition of 'goods', Section
2(31A) defines 'Local Body Tax' (LBT), and Section 2(42) contains the
definition of 'Octroi'. These two provisions read as under:
“2. Definitions.
In this Act, unless there be something repugnant in the subject or context,
–
xx xx xx
(25) “goods” includes animals;
xx xx xx
(31A) “Local Body Tax” means a tax on the entry of goods into the limits
of the City, for consumption, use or sale therein, levied in accordance
with the provisions of Chapter XIB, but does not include cess as defined in
clause (6A) and octroi as defined in clause (42);
xx xx xx
(42) “octroi” means a cess on the entry of goods into the limits of a city
for consumption, use or sale therein; but does not include a cess as
defined in clause 6A or Local Body Tax, as defined in clause (31A).”
As is clear from the reading of Section 2(31A), LBT is the tax on the entry
of goods into the limits of the city, when these goods are for consumption,
use or sale. The tax is to be levied in accordance with the provisions of
Chapter XIB. It, however, specifically excludes Octroi, as defined in
Section 2(42. It also becomes clear that Octroi is a cess on the entry of
goods into the limits of a city for consumption, use or sale therein, but
it does not include a cess as defined in clause (6A) or LBT. Both these
levies are on the goods that enter into the limits of a city for
consumption, use or sale therein.
The charging section, for imposition of tax under the Act, is Section 127.
This provision enumerates various types of taxes. Sub-section (1) thereof
empowers the Corporation to impose two kinds of taxes, namely, property tax
and a tax on vehicles, boats and animals. Sub-section (2) also authorises
the Corporation to impose certain other kinds of taxes which, inter alia,
include Octroi and a cess on entry of goods in lieu of Octroi. Clause
(aaa) was inserted in sub-section (2) by way of amendment carried out vide
Mah.27 of 2009, with effect from August 31, 2009, whereby LBT was also
included as another form of tax which could be levied and this clause reads
as under:
“(aaa) Local Body Tax on the entry of the goods into the limits of the
City for consumption, use or sale therein, in lieu of octroi or cess, if so
directed by the State Government by Notification in the Official Gazette;”
Procedure for levying such a tax is contained in Section 149 and we would
like to reproduce sub-section (1) thereof, which is as under:
“149. Procedure to be followed in levying other taxes.
(1) In the event of the Corporation deciding to levy any of the taxes
specified in sub-section (2) of section 127, it shall make detailed
provision in so far as such provision is not made by this Act, in the form
of rules, modifying, amplifying or adding to the rules at the time in force
for the following matters, namely:
(a) the nature of the tax, the rates thereof, the class of classes of
persons, articles or properties liable thereto and the exemptions
therefrom, if any, to be granted;
(b) the system of assessment and method of recovery and the powers
exercisable by the Commissioner or other officers in the collection of the
tax;
(c) the information required to be given of liability to the tax;
(d) the penalties to which persons evading liability or furnishing
incorrect or misleading information or failing to furnish information may
be subjected;
(e) such other matters, not inconsistent with the provisions of this Act,
as may be deemed expedient by the Corporation:
Provided that no rules shall be made by the Corporation in respect of any
tax coming under clause (f) of sub-section (2) of section 127 unless the
State Government shall have first given provisional approval to the
selection of the tax by the Corporation.”
In order to have the stock of all the relevant provisions of this Act,
another provision which needs to be noticed is Section 152P, which relates
to the provisions relating to LBT. It is to the following effect:
“152P. Levy of Local Body Tax.
Subject to the provisions of this Chapter and the rules, the Corporation,
to which the provisions of clause (aaa) of sub-section (2) of section 127
apply, may, for the purposes of this Act, levy and collect Local Body Tax
on the entry of goods specified by the State Government by notification in
the Official Gazette, into the limits of the City, for consumption, use or
sale therein, at the rates specified in such notification.”
What follows from the conjoint reading of the aforesaid provisions is that
LBT or Octroi is a tax 'on the entry of goods into the limits of the city',
which goods are meant for 'consumption, use or sale therein'. In this
backdrop, we have to find out the true nature of the Sodexo Meal Vouchers
and to ascertain whether they are 'goods'.
The appellant had resisted the imposition of LBT primarily on the ground
that it was providing services to the establishments with whom it had
entered into contracts and, therefore, such agreements were for service and
not for sale of any goods. The High Court has negated the contention
primarily on the ground, which, in fact, is the sole ground, that the
scheme postulates printing of the paper vouchers by the appellant which are
sold to its customers. The said customers, in turn, provide the vouchers
to their employees who use these vouchers in the restaurants or different
places or outlets to get ready-to-eat items and beverages of the face value
printed on the said vouchers. Therefore, the vouchers are used to pay the
price for food items and beverages distributed to users. The High Court,
in the passing, has also remarked that these vouchers are capable of being
sold by the appellant after they are brought into the limits of the city.
Therefore, the said vouchers have its utility and the same are capable of
being paid or sold and same are capable of being delivered, stored and
possessed. Thus, according to the High Court, the test laid down by this
Court in Tata Consultancy Services v. State of Andhra Pradesh[1] has been
satisfied.
We may mention at this stage itself that the learned counsel for the
respondent hammered the aforesaid reasons given by the High Court by
adopting these reasons as his arguments. Learned counsel for the
appellant, on the other hand, referred to the intrinsic nature of the
transaction with the aid of RBI Policy on the subject and certain judgments
of this Court, on the basis of which he was vociferous in his submission
that in reality it was only a service which was provided by the appellant
with no element of 'goods' involved in the transaction.
We have already taken note of the nature of the transaction. After going
through the relevant provisions and the principle laid down in various
judgments explaining the features of 'services' and 'goods', we are of the
opinion that the Sodexo Meal Vouchers cannot be treated as 'goods' for the
purpose of levy of Octroi or LBT. There are at least three fundamental
and principal reasons for coming to this conclusion, which we would like to
discuss in detail hereinafter.
(I) Exact Nature of Meal Vouchers:
The basic mistake which has been committed by the High Court is to proceed
on the basis that after printing of the paper vouchers, these are sold by
the appellant to its customers. A diagramatic representation of the
business model of the appellant, already depicted above, would make it
manifest that the vouchers are not the commodity which are sold. If the
face value of the said vouchers is rps ?50, by giving these vouchers to its
customers, the appellant only takes specified service charges from its
customers, which is normally ?2 for ?50 voucher. Likewise, when these
vouchers are given by the customers to its employees and the employees
present the same to various affiliates with whom the appellant had made the
arrangements and those affiliates supply the goods against those vouchers,
while reimbursing the cost of these vouchers to the said affiliates, the
appellant again takes service charges from these affiliates, which is again
a sum of ?2. Thus, insofar as the appellant is concerned, it has made the
arrangements with the affiliates for supply of goods against those
vouchers. This arrangement is made to help the customers by simply
facilitating the provision for making available food items, etc. of a
particular amount, represented by vouchers, to the employees of these
customers. No doubt, vouchers bear a particular value and for such value,
goods are provided to the employees. However, these goods are not provided
by the appellant, but by the affiliates. The appellant is only a
facilitator and a medium between the affiliates and customers and is
providing these services. The intrinsic and essential character of the
entire transaction is to provide services by the appellant and this is
achieved through the means of said vouchers. Goods belong to the
affiliates which are sold by them to the customers' employees on the basis
of vouchers given by the customers to its employees. It is these
affiliates who are getting the money for those goods and not the appellant,
who only gets service charges for the services rendered, both to the
customers as well as the affiliates.
It is to be borne in mind that the vouchers are not 'sold' by the appellant
to its customers, as wrongly perceived by the High Court, and this
fundamental mistake in understanding the whole scheme of arrangement has
led to wrong conclusion by the High Court. The High Court has also wrongly
observed that vouchers are capable of being sold by the appellant after
they are brought into the limits of the city. These vouchers are printed
for a particular customer, which are used by the said customer for
distribution to its employees and these vouchers are not transferrable at
all.
(II) Transaction Regulated By RBI Guidelines:
As already pointed out above, without the sanction/ authorisation of the
RBI to operate such a payment system under the Payment and Settlement
Systems Act, 2007, nobody can operate such a system, as the purpose of the
said Act is to regulate the payment and settlement thereof by means of
'Paper Based Vouchers'. An insight into the Policy Guidelines dated March
28, 2014 issued by the RBI to regulate such transactions would also
clinchingly bears out that the real nature of the transaction is to provide
service and by no stretch of imagination these vouchers can be termed as
'goods'. The very first para, viz. Para A, stipulates the purpose of these
Guidelines and Rules as follows:
“A. Purpose
To provide a framework for the regulation and supervision of persons
operating payment systems involved in the issuance of Pre-paid Payment
Instruments (PPIs) in the country and to ensure development of this segment
of the payment and settlement systems in a prudent and customer friendly
manner. For the purpose of these guidelines, the term 'persons' refers to
'entities' authorized to issue prepaid payment instruments and 'entities'
proposing to issue pre-paid payment instruments.”
Introduction to these Guidelines mentions that the same are passed after a
comprehensive review of the extant Guidelines and Instructions for the
purpose of laying down the basic eligibility criteria and the conditions
for operations of such payment systems in the country. Some of the
definitions given in para 2 are reproduced below for better understanding
of the system:
“2. Definitions
2.1 Issuer: Persons operating the payment systems issuing pre-paid
payment instruments to individuals/organizations. The money so collected
is used by these persons to make payment to the merchants who are part of
the acceptance arrangement directly, or through a settlement arrangement.
2.2 Holder: Individuals/Organizations who acquire pre-paid payment
instruments for purchase of goods and services, including financial
services.
2.3 Pre-paid Payment Instruments: Pre-paid payment instruments are
payment instruments that facilitate purchase of goods and services,
including funds transfer, against the value stored on such instruments.
The value stored on such instruments represents the value paid for by the
holders by cash, by debit to a bank account, or by credit card. The pre-
paid instruments can be issued as smart cards, magnetic stripe cards,
internet accounts, internet wallets, mobile accounts, mobile wallets, paper
vouchers and any such instrument which can be used to access the pre-paid
amount (collectively called Prepaid Payment Instruments hereafter). The
pre-paid payment instruments that can be issued in the country are
classified under three categories viz. (i) Closed system payment
instruments (ii) Semi-closed system payment instruments and (iii) Open
system payment instruments.
2.4 Closed System Payment Instruments: These are payment instruments
issued by a person for facilitating the purchase of goods and services from
him/it. These instruments do not permit cash withdrawal or redemption. As
these instruments do not facilitate payments and settlement for third party
services, issue and operation of such instruments are not classified as
payment systems.
2.5 Semi-Closed System Payment Instruments: These are payment instruments
which can be used for purchase of goods and services, including financial
services at a group of clearly identified merchant locations/establishments
which have a specific contract with the issuer to accept the payment
instruments. These instruments do not permit cash withdrawal or redemption
by the holder.
2.6 Open System Payment Instruments: These are payment instruments which
can be used for purchase of goods and services, including financial
services like funds transfer at any card accepting merchant locations
(point of sale terminals) and also permit cash withdrawal at ATMs/Bcs.
xx xx xx
2.8 Merchants: The establishments who accept the PPIs issued by PPI
issuer against the sale of goods and services.”
In order to ensure that payment received from the customer is paid to the
affiliates against those vouchers, Para 8 provides for the deployment of
money collected. As per this, the amount thus collected has to be kept in
the escrow account and the persons, like the appellant herein, are under
obligation to use this amount only for making payments to the participating
merchant establishments and other permitted payments.
Read in the aforesaid context, insofar as the appellant is concerned, it is
only a service provider on the touchstone of the test laid down in Bharat
Sanchar Nigam Ltd. & Anr. v. Union of India & Ors.[2] Paragrah 87 of this
judgment, enumerating this test, is reproduced below:
“87. It is not possible for this Court to opine finally on the issue.
What a SIM card represents is ultimately a question of fact, as has been
correctly submitted by the States. In determining the issue, however the
assessing authorities will have to keep in mind the following principles:
if the SIM card is not sold by the assessee to the subscribers but is
merely part of the services rendered by the service providers, then a SIM
card cannot be charged separately to sales tax. It would depend ultimately
upon the intention of the parties. If the parties intended that the SIM
card would be a separate object of sale, it would be open to the Sales Tax
Authorities to levy sales tax thereon. There is insufficient material on
the basis of which we can reach a decision. However we emphasise that if
the sale of a 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. In our opinion
the High Court ought not to have finally determined the issue. In any
event, the High Court erred in including the cost of the service in the
value of the SIM card by relying on the “aspects” doctrine. That doctrine
merely deals with legislative competence. As has been succinctly stated in
Federation of Hotel & Restaurant Assn. Of India v. Union of India, (2005) 4
SCC 214: (SCC pp.652-53, paras 30-31)
“ '...subjects which in one aspect and for one purpose fall within the
power of a particular legislature may in another aspect and for another
purpose fall within another legislative power'.
xx xx xx
There might be overlapping; but the overlapping must be in law. The same
transaction may involve two or more taxable events in its different
aspects. But the fact that there is overlapping does not detract from the
distinctiveness of the aspects.”
Further, para 20 of the judgment of this Court in Idea Mobile Communication
Limited. v. Commissioner of Central Excise and Customs, Cochin[3], shall be
applicable here as well making it a case of service and not sale of goods.
This para is as under:
“20. The charges paid by the subscribers for procuring a SIM card are
generally processing charges for activating the cellular phone and
consequently the same would necessarily be included in the value of the SIM
card. There cannot be any dispute to the aforesaid position as the
appellant itself subsequently has been paying service tax for the entire
collection as processing charges for activating cellular phones and paying
the service tax on the activation. The appellant also accepts the position
that activation is a taxable service. The position in law is therefore
clear that the amount received by the cellular telephone company from its
subscribers towards the SIM cards will form part of the taxable value for
levy of service tax, for the SIM cards are never sold as goods independent
from services provided. They are considered part and parcel of the
services provided and the dominant position of the transaction is to
provide services and not to sell the material i.e. SIM card which on its
own but without the service would hardly have any value at all.”
We may also take note of the judgment of this Court in Sunrise Associates
v. Govt. of NCT of Delhi & Ors.[4], where this Court considered as to
whether lottery tickets can be treated as goods and after discussing the
earlier judgment in H. Anraj v. Government of Tamil Nadu[5], pointed out
that the primary test would be as to whether such lottery tickets would
constitute a stock in trade of every dealer and, therefore, is a
merchandise which can be bought and sold in the market. This was followed
in another judgment in Yasha Overseas v. Commissioner of Sales Tax &
Ors.[6], wherein again the test of 'flexibility in its utilisation and its
transferability were discussed and applied in the context of REP licences'
to determine whether such licences were goods or not.
We may mention here that the appropriate test would be as to whether such
vouchers can be traded and sold separately. The answer is in the negative.
Therefore, this test of ascertaining the same to be 'goods' is not
satisfied.
(III) Real Character Of The Transaction Is The Facility By The Customers As
Employers To Their Employees:
Section 17 of the Income Tax Act, 1961, defines 'salary' in the hands
of the employees which becomes taxable under the Income Tax Act. Various
components of salary are enumerated therein. Clause (viii) of sub-section
(1) of Section 17 includes 'the value of any other fringe benefit or
amenity as may be prescribed' as part of salary. Rule 3 of the Income Tax
Rules prescribes the method of 'valuation of perquisites'. We are
concerned with Rule 3(7)(iii), which deals with the value of free food,
etc. and reads as under:
“(iii) The value of free food and non-alcoholic beverages provided by the
employer to an employee shall be the amount of expenditure incurred by such
employer. The amount so determined shall be reduced by the amount, if any,
paid or recovered from the employee for such benefit or amenity:
Provided that nothing contained in this clause shall apply to free food and
non-alcoholic beverages provided by such employer during working hours at
office or business premises or through paid vouchers which are not
transferable and usable only at eating joints, to the extent the value
thereof in either case does not exceed fifty rupees per meal or to tea or
snacks provided during working hours or to free food and non-alcoholic
beverages during working hours provided in a remote area or an off-shore
installation.”
Thus, the value of such free food and non-alcoholic beverage provided by an
employer to an employee is treated as expenditure incurred by the employer
and amenity in the hands of the employee. It is this perquisite given by
the customer to its employees by adopting the methodology of vouchers and
for its proper implementation, services of the appellant are utilised.
For all the aforesaid reasons, we are of the opinion that the judgment of
the High Court has not discussed and decided the issue correctly and
warrants interference. We, thus, allow these appeals and set aside the
judgment of the High Court by holding that Sodexo Meal Vouchers are not
'goods' within the meaning of Section 2(25) of the Act and, therefore, not
liable for either Octroi or LBT.
There shall, however, be no order as to costs.
.............................................J.
(A.K. SIKRI)
.............................................J.
(ROHINTON FALI NARIMAN)
NEW DELHI;
DECEMBER 09, 2015.
-----------------------
[1] (2005) 1 SCC 308
[2] (2006) 3?