Ali Singhania Bulk Carriers vs State of Karnataka

V.G. Sabhahit, J.—This petition is filed by the assessee being aggrieved by the order passed by the Joint Commissioner of Commercial Taxes (Appeals), Bangalore, dated August 31, 2005, wherein the two appeals filed by the appellant herein challenging the assessment order passed u/s 12(3) of the Karnataka Sales Tax Act, 1957 read with rule 18(3) of the Karnataka Sales Tax Rules, 1957 for the period ending March 31, 2003 and March 31, 2004 determining the taxable turnover at Rs. 2,79,95,630 and Rs. 2,79,95,630 and Rs. 5,71,54,812 and Rs. 5,71,54,812, respectively declared total taxable turnover as nil respectively for both the periods was concluded by the Deputy Commissioner of Commercial Taxes (Assessments-4), Bangalore Rural, Bangalore, by order dated March 14, 2006 while dismissing the appeal. The material facts for deciding the question of law that arises for determination in this appeal are as follows:

The appellant herein is a partnership firm being fleet owners doing transport contract business at Varthur Hobli, Koramangala, Bangalore. The appellant had not registered as a dealer under the Karnataka Sales Tax Act, 1957. During the course of inspection, it was noticed that the dealer was engaged in transporting concrete mixture to M/s. Grasirn industries Limited, Bangalore, for purposes of transportation of ready mix concrete taking into consideration the periodical rentals which would amount to transfer of right to use any goods, taxable u/s 5C of the Karnataka Sales Tax Act (hereinafter called as, "the Act"). Inspite of liability to tax on the dealer, he has failed to obtain registration u/s 10 of the Act and documents including the documents dated October 11, 2002 was seized and proceedings were initiated u/s 28(6) of the Act from October 1, 2002 to March 31, 2003. The proceedings culminated with the confirmation order u/s 28(6) of the Act. Thereafter proceedings were transferred to the assessing officer-Deputy Commissioner of Commercial Taxes (Assessment 4), "Bangalore Division, Bangalore. The assessing officer after hearing the assessee concluded that in view of the terms of the agreement dated October 11, 2002, the effective control of the 12 vehicles was placed at the disposal of M/s. Grasirn industries and the control was with M/s. Grasim Industries and possession was also with M/s. Grasim Industries and the driver had to pass under M/s. Grasim Industries though he was employed by the assessee and the mere fact that the driver was incharge of the vehicle and vehicle was being withdrawn two days in a month for maintenance is not by itself mean that the assessee was in effective control of the vehicle and therefore, the said transaction to transfer all the rights to use the vehicle placed at the disposal of the M/s. Grasim Industries accordingly chargeable u/s 5C and accordingly imposed tax and penalty and passed the order of assessment on January 7, 2005, Being aggrieved by the said order, two appeals are filed before the Joint Commissioner of Commercial Taxes (Appeals) for the assessment years 2002-2003 and 2003-04.

The appellate authority after considering the contents of the agreement and the fact; that the vehicle concrete mix transport vehicle which was placed at the disposal of M/s. Grasim Industries was under the effective control of the first party M/s. Grasim Industries and the vehicles were in possession of M/s. Grasim Industries and assessee had lost the possession of the said vehicles following the judgment of the Punjab and Haryana High Court in Harbans Lal and Another Vs. State of Haryana, , the appellate authority confirmed the order of assessment including imposition of penalty. Being aggrieved by the said order passed by the appellate authority, two appeals were preferred before the Karnataka Appellate Tribunal in S.T.A. Nos. 266 and 267 of 2006.

The Karnataka Appellate Tribunal by order dated October 31, 2008 dismissed both the appeals confirming the order passed by the appellate authority. Being aggrieved by the order passed by the Karnataka Appellate Tribunal this revision is filed by the assessee and prayer in this revision is restricted to S.T.A. No. 266 of 2006 and the assessee-petitioner has accepted the order passed in S.T.A. No. 267 of 2006 dated October 30, 2008 wherein order was passed holding that the transaction under the agreement dated October 11, 2002 is taxable u/s 5C of the Act.

We have heard learned counsel appearing for the revision-petitioner and the learned Government Advocate appearing for the respondent and the reply arguments of the learned counsel appearing for the petitioner.

Having regard to the contentions urged by the counsel appearing for the parties, the question of law that arises for determination in this petition is:

(i) Whether the order passed by the Karnataka Appellate Tribunal dated October 31, 2008 in S.T.A. No. 266 of 2006, having regard to the facts and circumstances of the case and contents of the agreement in holding that the assessee has right to use 12 vehicles, possession of which was handed-over to M/s. Grasim Industries and wherefore exigible to tax u/s 5C of the Act is justified or calls for interference in this revision?

The learned counsel appearing for the petitioner has taken us through the contents of the agreement dated October 11, 2002. He has mainly relied upon clauses A, B, F and H which read as follows:

(A) That the second party will maintain and provide a dedicated fleet of 12 vehicles to transport the produce of the first party from their plant to the various customers in the city of Bangalore. The number of vehicles required to be dedicated from the use will be subject to change and the parties will mutually agree to the new fleet size. This number shall not change unless otherwise indicated by the first party and agreed to by the second party and the remaining terms and conditions of this agreement will remain unaffected by this change.

(B) That the second party will ensure that adequate number of vehicles are made available on a 24/7 basis, i.e., 24 hours and everyday of the week. The first party agrees that the second party will require up to two days a month for the maintenance and upkeep of vehicle and will therefore, allow two days a month for this activity and not to pay consideration as fixed in clause I.

(F) That the second party has also agreed to obtain all statutory clearances from the local authorities required including the entry permission in the "NO ENTRY" zones at all times. The first party shall not be liable for any reimbursement for any expenses incurred in this connection. The vehicles will be equipped by the second party with licensed walkie-talkies to facilitate communication between, the plant and the vehicles.

(H) That the second party will obtain proper receipts from the customers of the first party after the goods are delivered and also submit reports to the first party in the formats supplied by the first party at the required intervals.

In support of his contention that the agreement is only for providing services of the 12 vehicles belonging to the assessee to the first party in the agreement, M/s. Grasim Industries Ltd. There is no effective transfer of the control of the vehicle and the abovesaid clause would clearly show that vehicles can be taken back for two days for repair and the driver will be provided by the assessee and driver shall possess licence for driving the vehicle and necessary orders for regulation of traffic imposed should be maintained by the assessee and not by M/s. Grasim Industries and therefore, the vehicles continued to be in effective control of the assessee and the driver who was in custody of the vehicle on behalf of the assessee and therefore, there is no transfer of any right to use the vehicles and that was only service provided. In support of his contention, he has relied upon a decision of the High Court of Andhra Pradesh in W. P. No. 6685 of 1989 dated December 15, 1989 in the case of Rashtriya Ispat Nigam Ltd. Vs. Commercial Tax Officer, Company Circle, Visakhapatnam, wherein the High Court was considering the question about scope of the transaction u/s 5 of the Andhra Pradesh General Sales Tax Act, 1957 and the hire charges collected by a person on supply of machinery for execution of his work to any contractor. He has relied on the following observation in paras 7, 9 and 14 of the order which is as under (pages 186-188 in 77 STC):

It is this category of bailment of goods that is the tax base u/s 5E of the Act. The taxable event u/s 5E is the transfer of the right to use any goods. What does this phrase connote? This means that unless there is a transfer of the right to use the goods, no occasion for levying tax arises; providing a facility which involves the use of goods nor even a right to use the goods is not enough, there must be a transfer of that right.

....

The essence of transfer is passage of control over the economic benefits of property which results in terminating rights and other relations in one entity and creating them in another. While construing the word ''transfer'' due regard must be had to the thing to be transferred. A transfer of the right to use the goods necessarily involves delivery of possession by the transferor to the transferee. Delivery of possession of a thing must be distinguished from its custody. It is not uncommon to find the transferee of goods in possession while transferor is having custody. When a taxi cab is hired under ''rent-a-car'' scheme, and a cab is provided, usually driver accompanies the cab; there the driver will have the custody of the car though the hirer will have the possession and effective control of the cab. This may be contrasted with the case when a taxi car is hired for going from one place to another. There the driver will have both the custody as well as the possession; what is provided is service on hire. In the former case, there was effective control of the hirer (transferee) on the cab whereas in the latter case it is lacking. We may have many examples to indicate this difference.

....

In our view, whether the transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as a whole, to determine the nature of the transaction. From a close reading of all the clauses in the agreement, it appears to us that the contractor is entitled to make use of the machinery for purposes of execution of the work of the petitioner and there is no transfer of right to use as such in favour of the contractor. We have reached this conclusion because the effective control of the machinery even while the machinery is in the use of the contractor is that of the petitioner-company. The contractor is not free to make use of the same for other works or move it out during the period the machinery is in his use. The condition that he will be responsible for the custody of the machinery while the machinery is on the site does not militate against the petitioners'' possession and control of the machinery. For these reasons, we are of the opinion that the transaction does not involve transfer of the right to use the machinery in favour of the contractor. As the fundamental requirement of section 5E is absent, the hire charges collected by the petitioner from the contractors are not exigible to sales tax.

The learned counsel submitted that the said order passed by the High Court of Andhra Pradesh has been confirmed by the Supreme Court in State of Andhra Pradesh and Another Vs. Rashtriya Ispat Nigam Ltd., wherein the order passed by the High Court has been confirmed.

The learned counsel also submitted that the quantification of the penalty impost is excessive and the appellant was under the bona fide impression that since only the service of the vehicle was provided to M/s. Grasim industries and there was no transfer of use of vehicles, transaction was not taxable u/s 5B and therefore, the assessee has not registered under the Act and there is no wilful violation of the provisions of the Act and therefore, penalty may be reduced.

The learned Government Advocate submitted that the terms of the agreement would clearly show that the agreement clearly provides for right to transfer of the use of the vehicle belonging to the assessee to the first party in the agreement to M/s. Grasim Industries. The vehicle will be in the possession of M/s. Grasim Industries for 24 hours on all the seven days except for repair wherein the assessee is entitled to withdraw the vehicles for maintenance and in consideration of the said right to use the same Rs. 3,718 per day per vehicle has been paid and the said amount is payable to the owner of the vehicle is used or not and further the driver to act on the instructions of the M/s. Grasim Industries and not at the instructions of the assessee. Therefore, both effective control and possession of the vehicle is with M/s. Grasim Industries and therefore, there is right to transfer of the use of the goods taxable u/s 5C of the Act.

The learned Government Advocate has relied upon the decision in Harbans Lal and Another Vs. State of Haryana, which has been relied upon by the first appellate authority.

We have given careful consideration to the contentions of the learned counsel appearing for the parties and scrutinized the material on record in the light of the principles laid down in the decision rendered by the counsel appearing for the parties.

It is clear from the perusal of the agreement entered into between the assessee and M/s. Grasim Industries dated October 11, 2002 and that the agreement is entered into by M/s. Grasim Industries with the assessee who is described as second party to the agreement and agreement is entered into as the first party looking for transporter who can take care of the transporting needs of their plant in Bangalore by providing requisite solutions to carter to their varied needs, whereas the second party-assessee was looking for advancing their business interests in Bangalore and have approached the first party to offer their services of transporting needs of the first party. It is well-settled that mere title given to the agreement does not by itself be conclusive and the actual terms and conditions of the agreement have to be taken into account. It is clear from the agreement that as per the agreement the assessee will maintain and provide a dedicated fleet to transport the produce of the first party from their plant to the various customers in the city of Bangalore. The number of vehicles requires to be dedicated for the use would be subject to change in requirement in mutual agreement on the said contract and change and that the assessee shall ensure adequate number of vehicles are made available on 24 x 7 basis, i.e., 24 hours on all the seven days of the week. The first party agrees that the second party may require up to two days a month for maintenance and upkeep of the vehicle and therefore, allowed two days in a month for this activity and not to pay consideration as fixed in clause I. It is clear from the clause dealing with the payment that in clause (i) in consideration of services rendered as contained in the agreement, the first party agrees to pay a sum of Rs. 3,718 per day per vehicle to the second party for vehicle available for actual use and subject to rates mentioned in the clause are all inclusive and not tax or cess of any nature was by the first party. Clause (i) also provides that the first party also agrees to reimburse the second party for the diesel and lubricants as per the Schedule A to the agreement.

It is clear from the abovesaid clause in the agreement that in the present case where the subject-matter of transfer is the vehicle transfer to effective use of such vehicle, the possession of 12 vehicles to transport the produce of the first party has been handed-over to the first party by the assessee. The first party is in possession of the said vehicle and the said vehicles will be available to the first party on 24 x 7 basis, i.e., 24 hours on all the seven days of week, except for two days for maintenance and consideration paid is Rs. 3,718 per day per vehicle inclusive of all taxes which would clearly indicate that the possession of the vehicle is with the M/s. Grasim Industries. So far as the effective control of the vehicles are concerned, having regard to the abovesaid clause, it cannot be denied that the effective control of the vehicles which is in the possession of the first party is also with the first party M/s. Grasim Industries and not the assessee as the assessee can use it at any time of the day except on the days when it is withdrawn for maintenance and payment would be made per day per vehicle and therefore, effective control of the vehicle is also with the first party, M/s. Grasim Industries. Though the driver is the employee of the assessee and he is also placed with the vehicle for use of the vehicle by the first party, the driver has to obey the instructions of the first party and he is authorised to obtain receipts for having completed the transportation as is shown in the agreement.

The decision relied upon by the learned counsel for the petitioner in Rashtriya Ispat Nigam Ltd., is not helpful to the petitioner in the present case as in the said case, the court was considering the question as to whether supply of machinery for purposes of execution of work and there was no transfer of right to use in favour of the contractor. The assessee had undertaken to supply machinery to the contractor for the use and for purposes of being used, in execution of the contract work of the petitioner and received charges for the same. However, there is restriction that the machinery should not be shifted to another work and therefore, under-those circumstances, it was held that the effective control of the machinery was continued to be with the Rashtriya Ispat Nigam Ltd. In the same case which has been confirmed by the honourable Supreme Court it has been laid down that whether this transfer of right to use or not is a question of fact which is to be determined in each cases having regard to the terms of contract under which there is said to be transfer of right to use and therefore the said decision is not helpful to the counsel for the petitioner in the present case.

However, the decision relied upon by the learned Government Advocate in Harbans Lal and Another Vs. State of Haryana, which has also been relied upon by the first appellate authority is similar to the present case wherein, on perusal of the agreement in the said case wherein the petitioner-company was engaged in the business of conducting tours and also entering into contract for hiring of its buses for the purposes of transportation of personnel of the company. In the agreement entered into between M/s. Eicher Tractor Limited to make available four buses to ferry the employees of M/s. Eicher Tractor Limited from New Delhi to M/s. Eicher Tractor Limited, Faridabad in the morning and back from M/s. Eicher Tractor Limited to Delhi. Having regard to the terms of the agreement which is similar in the present case, it was held that it can be held that effective control of the vehicle remains with the owner after the agreement is executed cannot, be said that the effective control of the vehicle remains with the owner after the contract executed. There is acquisition of possession of the buses as distinguished from its custody by the M/s. Eicher Tractor Ltd. and the loss of possession so far as the petitioner is concerned, there is a transfer of possession of the buses as there is acquisition of the right by the transferee and loss of it by the transferor and effective possession and control of the buses pass on to the customers M/s. Eicher Tractor Limited. The mere feet that bus had to be maintained and driver and conductor was provided by the assessee-petitioner and buses were to be maintained by the petitioner would not give effective control of the buses. Having regard to the abovesaid concurrent finding arrived at by the assessing authority, appellate authority and the appellate Tribunal that the agreement entered into between the assessee and M/s. Grasim Industries amounts to transfer of right to use of the goods exigible to tax u/s 5C is justified and accordingly, we answer the substantial question of law against the petitioner and in favour of the Revenue. No other contention is raised. Accordingly, petition is dismissed.