TMI Blog2006 (10) TMI 498X X X X Extracts X X X X X X X X Extracts X X X X ..... ith 'Kirloskar' make 1000 KW 1500 RPM, 415 volts alternator alongwith required accessories. On enquiry with M/S Kesar Enterprises Limited Mumbai, it was found that a sum of ₹ 52, 58, 528/-, ₹ 51, 59, 537/- and ₹ 51, 59, 537/- were paid towards rent to the applicant during the years under consideration 1994-95, 1995-96 and 1996-97 respectively. Assessing authority passed ex-parte assessment orders against the applicant and levied the tax on the aforesaid lease rent under Section 3-F of the Act. The Assessment orders have been confirmed in appeals by the Deputy Commissioner (Appeals), Trade Tax, Bareilly. Applicant filed appeals before the Tribunal. Before the Tribunal, it was contended that the agreement was executed at Mumbai and, therefore, in view of the decision of the Apex Court in the case of 20th Century Finance Corporation, Ltd. and Anr. v. State of Maharashtra reported in 2000 UPTC 593, State of U.P. has no jurisdiction to levy the Tax. It was further submitted that the machinery were purchased by the applicant from M/S Punjab Chemicals Pharmaceuticals Ltd., and the same were dispatched directly from Punjab to Baheri at the premises of M/S Kesar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that in the bill dated 26th February. 1992, there is a reference of the order dated 28.11.1991. On these facts it has been held that it is not the case where, in pursuance of the order executed outside the State of U.P., machinery have been supplied and payments have been received. Assessing authority, however, observed that the agreement also reveals that before the agreement dated 24th March, 1992 one more agreement oral or written have been entered into and in pursuance thereof, the order was given on 28.11.1992 to M/S Punjab Chemicals Pharmaceuticals Limited for the purchases of the alleged machinery. With regard to the letter of intent dated 29th October, 1991, the assessing authority observed that it is simply a letter and is being produced with the intend to twist the fact of the case in favour of the applicant. Assessing authority after rejecting the plea of the applicant, levied the tax on the entire lease rent under Section 3-F of the Act. 4. Being aggrieved by the assessment orders for the aforesaid assessment years, applicant filed appeals before the Joint Commissioner (Appeals), Trade Tax, Bareilly. Joint Commissioner (Appeals) , Trade Tax, Bareil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erprises Limited, detailed agreement to be finalized later on. In pursuance of the said letter of intent, the orders dated 28.11.1991 were placed to M/S Punjab Chemicals Pharmaceuticals Limited for the purchase of machinery. Thereafter, Machinery were purchased against invoices Nos. E-99, E-99-A dated 26th February, 1992 and invoice No. E-100 dated 10th March, 1992. In two invoice Nos. E-99 and E-99A, there are reference of the order dated 28.11.1991 and in the invoice No. E-100 there is a reference of the order dated 28th January, 1992. Invoices were prepared in favour of the applicant in connection with M/S Kesar Enterprises Limited and such machinery were directly dispatched to M/S Kesar Enterprises Limited, therefore, movement of machinery were in pursuance of the agreement in the course of inter-State. He submitted that the letter of intent is a part of the agreement dated 24th March, 1992 and merely because there is no reference of the letter of intent in the agreement dated 24th March, 1992, it cannot be ignored. He submitted that the assessing authority on the basis of the invoices etc., has accepted that there was some agreement oral or written prior to the agreement dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Enterprises Limited. There is no dispute that the machinery which have been leased out and in respect of which lease rent have been received are the same which have been described in Annexure-1 of the lease agreement dated 24th March, 1992. 11. Perusal of the record reveals that there was some understanding between the applicant and M/S Kesar Enterprises Limited prior to 24th March, 1992 to provide machinery on lease. In the purchase invoices of the machinery referred hereinabove, the name of M/S Kesar Enterprises Limited are mentioned and in the dispatch particulars, the dispatch of the machinery have been shown at the premises of M/S Kesar Enterprises Limited. Assessing authority has also accepted that before the agreement dated 24th March, 1992, there was some agreement oral or written between the parties for the purchases and providing machinery on lease. Thus, in my view even though, there is no reference of the letter of intent dated 29th October, 1991 in the agreement dated 24th March, 1992, which should be, but on the facts and circumstances of the case, its existence cannot be disputed. Thus, the facts of the case are that the applicant and M/S Kesar Enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) in a case falling under Sub-clause (ii), if the goods are in the State at the time of transfer of property in such goods (whether as goods or in some other form) ' involved in for the execution of the works contract, notwithstanding that the agreement for the works contract has been wholly or in part entered into outside the State; (ii) in a case falling under Sub-clause (iv), if the goods are used by the lessee within the State during any period, notwithstanding that the agreement for the lease has been entered into outside the State or that the goods have been delivered to the lessee outside the State. Explanation-II- Notwithstanding anything contained in this Act, two independent sales or purchases shall, for the purposes of this Act, be deemed to have taken place- (a) when the goods or transferred from a principal to his selling agent and from the selling agent to his purchaser. (b) When the goods are transferred from the seller to a buying agent and from the buying agent to his principal, if the agent is found, in either of the cases aforesaid,- (i) to have sold the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) the amount representing the value of the goods exempted under section 4; (iii) the amount representing the value of the goods on the sale or purchase whereof tax has been levied or is leviable under this Act at some earlier stage; (iv) the amount representing the value of the goods manufactured in a new unit exempted under Section 4-A or Section 4-AAA; (v) the amount representing the value of the goods supplied to the contractor by the contractee, provided that the ownership of such goods remains with the contractee under the terms of the contract; (vi) the amount representing the labour charges for the execution of the works contract; (vii) all amounts paid to the sub-contractors as the consideration for execution of the works contract, whether wholly or in part: Provided that no deduction under this sub-clause shall be allowed unless the dealer claiming deduction produces proof that the sub-contractor is a registered dealer liable to tax under this Act and that such amount is included in the return of turnover filed by such sub-contractor under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , after considering the legal position including the decision in Gannon Dunkerley Company case, expressed following view: Before the Judgment of Supreme Court, however, sale was usually regarded as including a works contract. The question is ultimately one of policy, but the Commission would prefer restoration of the power to the States. Narrow interpretation of the expression 'sale' was not the practice before the Hon'ble Supreme Court judgment. Entries in the legislative list, should receive a broad interpretation. Fine nuances need not be material. The transactions resemble sale in substance. Hence, power should be given to the States. If this alternative is adopted there are several drafting devices open, e.f. (a) amending State List, Entry 54, or (b) adding a fresh entry in the State List, or (c) inserting in Article 366 a wide definition of 'sale' so as to include works contracts. The commission prefers the last one, it would avoid multiple amendments. 18. Keeping in view the said recommendation of the Law Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd other incidents of the tax as parliament may by law specify. 20. After the Forty-sixth Amendment various State Legislature amended their sales tax legislation to make provision for imposition of sales tax in relation to works contracts and transfer of right to use the goods. State of U.P. has made the amendments in the U.P. Trade Tax Act and has amended the definition of sale provided in Section 2 (h) and introduced Section 3-F to levy tax on the value of goods, involved in the execution of works contract and transfer of right to use the goods. Constitutional validity of Forty-Sixth amendments as well as amendment made in the State Legislation were challenged before the Apex Court in the Case of Builders Association of India v. Union of India reported in 1989 UPTC 645 (SC). Apex Court upheld the validity of amendment and further held that 'Sale Tax Laws' passed by the Legislatures of States levying taxes on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract are subject to the restrictions and conditions mentioned in each clause or sub-clause of Article 286 of the Constitution of India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting expenses incurred by the contractor for providing labour and other services from the value of the works contract. The charges for labour and services which are required to be deducted from the value of the works contract would cover (i) labour charges for execution of the works, (ii) amount paid to a sub-contractor for labour and services, (iii) charges or obtaining on hire or otherwise machinery and tools used for execution of the works contract, (iv) charges for planning, designing and architect's fees and (v) cost of consumables used in the execution of the works contract, (vi) out of establishment of the contractor to the extent it is relatable to supply of labour and services, (vii) other similar expenses relatable to supply of labour and services and (viii) profit earned by the contractor to the extent it is relatable to supply of labour and services. To deal with the cases where the contractor does not maintain proper accounts or the account books produced by him are not found worthy of credence by the Assessing Authority the Legislature may prescribe a formula for deduction of cost of labour and services on the basis of a perc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Central Sales Tax Act has to be decided in the light of the particular terms of the works contract and it cannot be decided in the abstract. As at present advised, we are not in a position to say that in no case, can there be a sale in the course of inter-State trade or commerce or an outside sale or a sale in the course of import in respect of a deemed sale resulting from transfer of property in goods involved in the execution of a works contract falling within the ambit of Sub-clause (b) of Clause (29-A) of Article 366 of the Constitution. It must, therefore, be held that while enacting a law imposing a tax on sale or purchase of goods under Entry 54 of the State List read with Sub-clause (b) of Clause (29-A) of Article 366 of the Constitution, it is not permissible for the State Legislature to make a law imposing tax on such a deemed sale which constitutes a sale in the course of inter-State trade or commerce under Section 3 of the Central Sales Tax Act or an outside sale under Section 4 of the Central Sales Tax Act or sale in the course of import or export under Section 5 of the Central Sales Tax Act. So also it is not permissible for the State Legislature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of import and export into a sale inside the State. The question whether a sale is an outside sale or a sale inside the State or whether it is a sale in the course of import or export will have to be determined in accordance with the principles contained in Sections 4 and 5 of the Central Sales Tax Act and the State Legislature will enacting the sales tax legislation for the State cannot make a departure from those principles. 23. It may be mentioned here that initially when Section 3-F was introduced, transactions covered under sections 3 4 and 5 of the Central Sales Tax Act have not been excluded. Thus, the provisions has been declared ultra vires by the Division Bench decision of this Court in the case of V.K. Singhal v. State of U.P. reported in 1995 UPTC 337. Thereafter, Section 3-F has been re-introduced in 1995 by Act No. 31 of 1995 with retrospective effect. Under the new amended Section 3-F of the Act transactions relating to Sections 3 4 and 5 of the Central Sales Tax Act have been excluded. Amended Section 3-F of U.P. Trade Tax Act has already been referred herein above. 24. Clause (d) of Article 366(29-A) which is Clause (a) of Section 3- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tue of Clause (ii) of Explanation 1 to Section 2 (h), the ambit of sale has been widen by including 'outside sale' as 'inside sale' on mere location of goods for use within the State irrespective of the fact that the agreement for transfer of right to use has been executed outside the State or whether the sale is outside the State, the tax is chargeable within the State. And, further, on account of a special provision for rates of tax, the other provision such as single point tax as well as exemption etc. is not applicable to the transaction of transfer of right to use any goods. We find that Clause (ii) of Explanation I of Section 2 (h) is in excess of legislative power under Entry 54, List-II of Seventh Schedule and, therefore, we direct that Clause (ii) of Explanation I of Section 2 (h) of the Act shall be read down to this effect that it would not be applicable to the transaction of transfer of right to use any goods if such deemed sale is (i) an outside sale, (ii) sale in course of the import of the goods into or export of the goods out of the territory of India and (iii) an inter State sale. 26. From the law laid down as above, it emerges that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non of completing the transfer of the right to use any goods, as was held by a Constitution Bench of this Court in 20th Century Finance Corporation Ltd. v. State of Maharashtra AIR 2000 SC 2436 . Once DoT connects the telephone line of the assigned number of the subscriber to the area exchange, access to other telephones is established. There cannot be denial of the fact that giving such an access would complete the transfer of the right to use the goods . With respect, the decision in 20th Century Finance Corporation Limited v. State of Maharashtra, cannot be cited as authority for the proposition that delivery of possession of the goods is not a necessary concomitant for completing a transaction of sale for the purposes of Article 366(29-A)(d) of the Constitution. In that decision the Court had to determine where the taxable event for the purposes of sales tax took place in the context of Sub-clause (d) of Article 366(29A). Some States had levied tax on the transfer of the right to use goods on the location of goods at the time of their use irrespective of the place where the agreement for such transfer of right to use such goods was made. Other States levied t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what is claimed to be goods by the respondents, are not deliverable at all by the service providers to the subscribers, the question of the right to use those goods, would not arise. (emphasis provided) In State of Andhra Pradesh and Anr. v. Rashtriya Ispat Nigam Ltd. (2003) 3 SCC 214 it was claimed by the Sales Tax Authorities that the transaction by which the owner of certain machinery had made them available to the contractors was a sale. The Court rejected the submission saying that: the transaction did not involve transfer of right to use the machinery in favour of contractors. The effective control of the machinery even while the machinery was in use of the contractor was that of the respondent Company; the contractor was not free to make use of the machinery for the works other than the project work of the respondent or (para 4 page 315) But in the case of Agrawal Brothers v. State of Haryana and Anr. AIR 1999 SC 2868 when the assessee had hired shuttering to favour of contractors to use it in the course of construction of buildings it was found that possession of the shuttering materials was transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer the same rights to others. 30. Under U.P. Trade Tax Act by Clause (ii) of Explanation-I of Section 2 (h) of the Act, the legislature has created a fiction and fix the situs of the sale in the State where the goods are used, notwithstanding that the agreement for lease has been entered outside the State. In view of the decision of the Apex Court, such fiction is valid. Therefore, the place of the execution of the agreement at Mumbai has no relevance in the present case. 31. Further, in view of the decision of the Apex Court in the case of 20th Century Finance Corporation Ltd and Anr. v. State of Maharashtra (supra) and Clause (i) of Section 3-F (2) (a) of the Act the amount representing the value of the goods covered by Sections 3 4 and 5 of the Central Sales Tax Act are to be excluded from gross turnover. Thus, the amount representing the sale value of the goods, which is imported in the course of inter-State under Section 3 of the Act would not be subject to tax under Section 3-F. 32. Now on the facts of the present case, question for consideration is whether the impugned transactions are covered by Section 3 of the Central ..... X X X X Extracts X X X X X X X X Extracts X X X X
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