Deciphering the scope of ‘goods’-A labyrinthine task!

Introduction

The scope and ambit of ‘goods’ has always been a contentious issue from a taxation perspective. Tax policies in India have witnessed an evolution of diverse taxes levied on the acts of production, manufacture, sale, lease and transfer of ‘goods’. Thus, situations where one has had to contend with the question of whether an article qualifies as ‘goods’ has been rather frequent.

Traditional legislative enactments such as the Constitution of India and Sale of Goods Act, 1930 were framed at a time when market conditions and human perspective had evolved to only identify a certain type of goods, mainly, items that were tangible and discernible to the naked eye. With the developments in technology, there is but no option to move beyond outdated notions and accept a more fluid definition of goods that would take within its domain even intangibles such as electronic books, music, applications etc. While legislative policies have taken their time to catch up with the technological boom, judicial intervention has played a major role in settling complex questions on whether particular articles meet the requirements of ‘goods’.

This issue has cropped up again in the context of the Income Tax Act, 1961 ("the Act"). The Finance Act, 2021 has inserted a new provision viz. Section 194Q to the Act. The same has been introduced with effect from 1^st July 2021. The Section applies to any buyer who is responsible for paying any sum to any resident seller for purchase of any goods of the value or aggregate of value exceeding fifty lakh rupees in any previous year. At the time of credit of such sum to the account of the seller or at the time of payment, whichever is earlier, the buyer is required to deduct an amount equal to 0.1% of such sum exceeding fifty lakh rupees as income tax. In the previous year, a similar provision[1] which required sellers to collect tax at source from buyers of goods, was introduced.

The introduction of goods into the realm of tax deduction under Income Tax is a rather novel feature. Earlier, only salary income and service incomes were subject to tax deduction for payments made to residents in India. Yet, the legislature in their wisdom has opted to not specifically provide for a definition to the term ‘goods’ under the Act. Whether this move is a genuine oversight or a planned attempt to not limit the scope of ‘goods’ is a debate for another time.

This aim of this Article is to focus on select items that have been subject to judicial scrutiny on the question pertaining to their qualification as ‘goods’, to determine if tax is required to be collected or deducted on the sale of these items.

Goods – Meaning and Scope

It is a settled principle of law that the words used in a provision, imposing taxes or granting exemption should be understood in the same way in which they are understood in ordinary parlance in the area in which the law is in force or by the people who ordinarily deal with them.[2] Since ‘goods’ has not been defined by the Act, recourse to allied laws is permissible.  

• The Constitution of India defines ‘goods’ to include all materials, commodities and articles.[3]
• The Sale of Goods Act, 1930 defines ‘goods’ to mean every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.
• The General Clauses Act, 1897 defines “movable property” to mean “property of every description except immovable properly”.[4]
• The expression “Immovable property” is defined to “include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth”.[5]

A bare reading of these definitions is indicative of the legislative intention to ensure a wide net that would encompass every possible kind of movable property within the ambit of ‘goods’. It is noteworthy that tax laws such as the Central Sales Tax Act, 1956, Value Added Tax (VAT) Acts and the latest Central Goods and Service Tax Act, 2017 (CGST Act) which contain specific definitions for ‘goods’, primarily draw inspiration from the Sale of Goods Act, 1930, subject to few departures.

One notable difference between the definition of goods under the Sale of Goods Act, 1930 and the CGST Act is the treatment metted out to actionable claims. While actionable claims have always been kept outside the purview of goods under the Sale of Goods Act, 1930, they are specifically included in the definition of goods under the CGST Act.

In order to determine whether a particular item is goods or not, tests have been laid by the Apex Court over the course of time. The tests that have developed are not as focused on the tangibility/intangibility of the property in question, rather the attention is more on the attributes of utility, capability of being bought and sold; and transmitted, transferred, delivered, stored and possessed.[6] In simpler terms, anything that can be brought to a market and purchased and sold is goods.[7]

Applying this understanding and placing reliance on the jurisprudence that has evolved on the subject of goods, the authors proceed to tabulate their views on whether some items qualify as goods.

It is anticipated that the above tabulation would assist buyers/sellers in determining the applicability of Section 194Q/Section 206C(1H) of the Act in situations where any of the said items are the subject matter of a purchase/sale.

It is worthwhile to note that a Circular issued by CBDT[9] has specifically clarified on the applicability of Section 194Q to transactions carried out over exchanges. It has been explained that Section 194Q shall not apply to securities/commodities traded over stock exchanges and electricity/power certificates sold through power exchanges.  The reason for this clarification is attributable to the fact that sometimes there is no one to one contract between buyers and sellers operating on these exchanges. One could infer from the same, that securities and electricity are otherwise goods that are capable of being bought and sold, thereby, attracting Section 194Q.

Conclusion

Considering the ambiguities surrounding this issue and the complex jurisprudence that has evolved, it is no doubt an uphill task for assessees to determine if items purchased or sold by them constitute goods on a case to case basis. While this subject has remained controversial for its complexities, time has come for the legislature to either clearly define the scope of ‘goods’ through appropriate legislative intervention or issue a Circular under Section 194Q laying down guidelines, especially in relation to some of the above discussed goods that are capable of dual views. This would go a long way in rendering provisions such as Section 194Q, effective.

[The authors are Joint Partner and Principal Associate, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys, Chennai]

[1] Section 206C(1H) of the Income Tax Act, 1961.

[2] Collector of Excise vs. M/s Parle Exports (P) Ltd. (1989) 1 SCC 345.

[3] Article 366(12) of the Constitution of India.

[4] Section 3(36) of General Clauses Act, 1897.

[5] Section 3(26) of General Clauses Act, 1897.

[6] Tata Consultancy Services 2004 (11) TMI 11 - SUPREME COURT.

[7] South Bihar Sugar Mills 1968 (2) TMI 36 - SUPREME COURT.

[8] A transaction of works contract may be subject to the provisions of Section 194-C in which case the provisions of Section 194-Q will not be applicable.

[9] Circular No. 13 of 2021 dated 30^th June 2021.