2000 (5) TMI 980 - SC - VAT and Sales Tax

Whether a State can levy sales tax on transfer of right to use goods merely on the basis that the goods put to use are located within its State irrespective of the facts that-(a) the contract of transfer of right to use has been executed outside the State; (b) sale has taken place in the course of an inter-State trade; and (c) sales are in the course of export or import into the territory of India? Held that - In the light of discussion as the equipment involved was unspecified goods and indeed an order for purchase of an unspecified equipment was made by the respondent after the lease the respondent did not become owner of the equipment till the same was despatched to the hirer so the transaction under sub-clause (d) could be complete only after the completion of the sale of the equipment which happened only when the equipment was actually delivered to the hirer in Hyderabad (Andhra Pradesh). Therefore the transaction of deemed sale under sub-clause (d) cannot be said to be complete on the execution of the contract of master lease. If that be so the question of the deemed sale being an inter-State sale would not arise In the instant case the purchase of the equipment was by the respondent the fact that the hirer wanted to hire the equipment might have prompted the respondent to place an order for its purchase but that fact is irrelevant in arriving at the conclusion whether the lease in respect of non-existent unspecified equipment would be complete on the execution of the master lease. On this aspect we have held that before an unspecified equipment reaches the hirer the sale of the equipment by the respondent itself would not be complete. The deemed sale under sub-clause (d) is only a consequential transaction which follows the completion of the sale in favour of the respondent and cannot precede it.

Issues Involved:

1. Power of State Legislature to levy sales tax on the transfer of right to use goods under Article 366(29A)(d) of the Constitution.
2. Situs of the taxable event on the transfer of right to use goods.
3. Validity of state legislations imposing sales tax on deemed sales.
4. Applicability of the Central Sales Tax Act's principles to deemed sales.
5. Whether the transaction of transfer of right to use goods can be considered a contract of bailment.
6. Constitutionality of specific provisions in the sales tax laws of Maharashtra, Karnataka, Tamil Nadu, Haryana, Uttar Pradesh, Rajasthan, and Andhra Pradesh.

Issue-wise Detailed Analysis:

1. Power of State Legislature to Levy Sales Tax:
The court examined whether State Legislatures have the power to levy sales tax on the transfer of the right to use goods under Article 366(29A)(d). It was determined that such power is subject to two limitations: one arising from entry 54 of List II, which is subject to entry 92-A of List I, and the other from restrictions in Article 286. Thus, states cannot levy sales tax on inter-State sales, sales outside the state, or sales in the course of import/export.

2. Situs of the Taxable Event:
The court held that the taxable event for the transfer of the right to use goods occurs when the contract transferring the right is executed. The situs of the sale is the place where the contract is executed, not where the goods are located for use. For oral or implied transfers, the taxable event occurs upon delivery of the goods.

3. Validity of State Legislations:
The court scrutinized the sales tax laws of Maharashtra, Karnataka, Tamil Nadu, Haryana, Uttar Pradesh, Rajasthan, and Andhra Pradesh. It found that the provisions in these laws, which deemed the transfer of right to use goods to occur within the state based on the location of goods, were beyond the legislative power conferred under entry 54 of List II. The court directed that these provisions be read down to exclude outside sales, inter-State sales, and sales in the course of import/export.

4. Applicability of Central Sales Tax Act's Principles:
The court clarified that the principles under sections 3 and 4 of the Central Sales Tax Act apply to deemed sales under Article 366(29A)(d). However, since the definition of "sale" in the Central Sales Tax Act was not amended post-Forty-sixth Amendment, these principles cannot be applied by analogy to fix the situs of deemed sales.

5. Contract of Bailment:
The court rejected the view that the transaction of transfer of right to use goods is a contract of bailment. It emphasized that such transactions are deemed sales under the legal fiction in Article 366(29A)(d), where the location or delivery of goods is immaterial. The court held that the transfer of the right to use goods involves both the passing of a right in and the domain of the goods.

6. Constitutionality of Specific Provisions:
The court examined specific provisions in the sales tax laws of various states:
- Maharashtra Act: The Explanation to section 2(10) was held to transgress legislative power and was directed to be read down.
- Karnataka Act: Explanation 3(d) to section 2(t) was similarly read down.
- Tamil Nadu Act: Explanation 3(a) to section 2(n) was read down.
- Haryana Act: Note 4 to section 2(l) was read down.
- Uttar Pradesh Act: Clause (ii) of Explanation I to section 2(h) was read down.
- Rajasthan Act: Explanation II(b) to section 2(38)(4) was read down.
- Andhra Pradesh Act: Clause (b) of section 5E was read down.

Separate Judgment Analysis:

Judge Syed Shah Mohammed Quadri:
Justice Quadri dissented on the interpretation of sub-clause (d) of clause (29A) of Article 366. He emphasized that the transfer of the right to use goods involves both the passing of a right and control over the goods. He argued that the taxable event is complete when control/domain of the goods is given to the hirer, not merely on the execution of a contract. He also highlighted that the actual use of goods is irrelevant for the taxable event under sub-clause (d). Justice Quadri found the impugned provisions of the state laws unconstitutional and struck them down.

Conclusion:
The court allowed the civil appeals and writ petitions, except for Civil Appeal Nos. 6218 to 6223 of 1995, which were dismissed. The relevant assessment orders were set aside, and the respondents were directed to reassess the appellants and petitioners in accordance with the principles laid down in the judgment.

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