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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
Abhay Desai the business. Even in the GST regime as per Sec. 17(5)(a) of the Central Goods & Services Tax
F.CA., LL.B., D.I.S.A. ('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 twicee. 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
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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 makingany gain or profit; as well as sales in connection with or incidental
orancillary 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 profitmotive, 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 somethingelse 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 tocontend
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
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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 incidentof 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 personswho 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 renderedredundant, 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;
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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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