2005 (1) TMI 672 - Other - Service Tax

National Court Ruling: Taxable Amount Must Reflect Consideration Received

The Court held that Articles 2, 5(6), and 6(2)(b) of the Sixth Directive prohibit national rules treating transactions with actual consideration as ... Taxable amount - transaction effected for consideration - application of goods or services for private use - Articles 5(6) and 6(2)(b) scope - Article 11A(1)(a) subjective value rule - subsidies directly linked to the priceTaxable amount - transaction effected for consideration - Articles 5(6) and 6(2)(b) scope - Article 11A(1)(a) subjective value rule - application of goods or services for private use - Whether Articles 2, 5(6) and 6(2)(b) of the Sixth Directive permit a Member State to treat supplies of goods or services for which an actual consideration is paid (even if lower than cost) as applications for private use and to determine the taxable amount on the basis of the purchase or cost price rather than the consideration actually paid. - HELD THAT: - The Court held that the general rule in Article 11A(1)(a) - that the taxable amount for supplies effected for consideration is the consideration actually received and thus the subjective value capable of being expressed in money - governs supplies of goods or services where an actual consideration is paid (paragraphs 21 and 28). The price being higher or lower than the supplier's cost is irrelevant to whether a transaction is a transaction effected for consideration; what matters is the direct link between supply and consideration actually received (paragraph 22). Articles 5(6) and 6(2) are provisions that treat transactions for which no consideration is received as supplies for consideration for VAT purposes, adopted to prevent a taxable person or staff obtaining untaxed advantages compared with final consumers (paragraphs 23 and 24). Consequently, those provisions relate only to transactions effected free of charge and do not apply where an actual consideration is paid by the purchaser (paragraph 24). The Court rejected the contention that Member States may recharacterise paid transactions merely because the consideration is lower than cost; risks of tax avoidance arising from symbolic payments must be addressed by derogation measures under Article 27, not by extending Articles 5(6) and 6(2) beyond their scope (paragraph 26). Finally, the cost incurred by the supplier itself in providing the service cannot form part of the taxable amount where only two parties are involved and no third party subsidy exists; subsidies directly linked to price are includible only where paid by a purchaser or a third party (paragraphs 27-29). [Paras 26, 27, 28, 29, 30]Articles 2, 5(6) and 6(2)(b) of the Sixth Directive preclude national rules treating transactions for which an actual consideration is paid as applications for private use and determining the taxable amount by reference to purchase or cost price; where consideration is actually paid the taxable amount is the consideration actually received under Article 11A(1)(a).Final Conclusion: The Court ruled that where employees pay an actual price for meals supplied by their employer, even if that price is lower than the employer's cost, the transactions are supplies effected for consideration and the taxable amount is the consideration actually received; Articles 5(6) and 6(2)(b) apply only to transactions effected free of charge. Issues Involved:1. Interpretation of Articles 2, 5(6), and 6(2)(b) of the Sixth Council Directive 77/388/EEC.2. Determination of the taxable amount for the provision of meals by a company to its staff.3. Compatibility of Swedish national provisions with the Sixth Directive.4. Application of VAT to transactions involving consideration less than cost price.Detailed Analysis:1. Interpretation of Articles 2, 5(6), and 6(2)(b) of the Sixth Council Directive 77/388/EEC:The case revolves around the interpretation of specific articles of the Sixth Directive related to VAT. Article 2(1) subjects the supply of goods or services for consideration to VAT. Article 5(6) treats the application of goods for private use or free of charge as supplies made for consideration if VAT on those goods was deductible. Article 6(2)(b) treats the provision of services free of charge for private use as supplies for consideration.2. Determination of the Taxable Amount for the Provision of Meals by a Company to Its Staff:The primary issue is whether the provision of meals by a company to its employees at a price lower than the cost should be taxed based on the actual consideration received or the cost price. According to Article 11A(1)(a) of the Sixth Directive, the taxable amount is the consideration obtained by the supplier, which includes subsidies directly linked to the price.3. Compatibility of Swedish National Provisions with the Sixth Directive:Swedish law equates the application of goods and services for private use with transactions where the consideration is less than the cost price, thus subjecting them to VAT. The Regeringsr'atten questioned whether this national provision aligns with Articles 2, 5(6), and 6(2)(b) of the Sixth Directive.4. Application of VAT to Transactions Involving Consideration Less Than Cost Price:The Court examined whether transactions with consideration less than the cost price should be treated as applications for private use under Articles 5(6) and 6(2)(b). The Greek and Swedish Governments argued that these articles extend VAT to such transactions to prevent unjustified advantages. Conversely, the Commission and Danish Government contended that these articles apply only to free-of-charge transactions.Court's Findings:General Rule for Taxable Amount:The Court emphasized that the taxable amount for the supply of goods or services is the consideration actually received by the taxable person, as stated in Article 11A(1)(a). This consideration must reflect the subjective value received, not an estimated objective value, and must be expressible in money.Application of Articles 5(6) and 6(2)(b):Articles 5(6) and 6(2) treat certain free-of-charge transactions as supplies for consideration to ensure equal treatment between taxable persons and final consumers. These provisions prevent taxable persons from escaping VAT when applying goods or services for private use.Consideration Paid by Employees:The Court noted that the employees of Scandic paid actual consideration for the meals, making the transaction one for consideration under Article 2. Therefore, Articles 5(6) and 6(2)(b) do not apply, as they concern transactions without actual consideration.Symbolic Consideration:The Court dismissed the Swedish Government's concern about symbolic consideration, stating that the risk of tax avoidance should be addressed through specific derogations under Article 27 of the Sixth Directive.Subsidies and Taxable Amount:The Court clarified that subsidies directly linked to the price form part of the taxable amount only in three-party situations. Since the case involved only Scandic and its employees, the cost incurred by Scandic could not be considered part of the taxable amount.Conclusion:The Court concluded that Articles 2, 5(6), and 6(2)(b) of the Sixth Directive preclude national rules treating transactions with actual consideration as applications for private use, even if the consideration is less than the cost price. The decision on costs was left to the national court, and costs incurred in submitting observations to the Court were deemed non-recoverable.