Commissioner of Trade Tax vs Rotomack Finance Pvt. Ltd.

Sudhir Agarwal, J.—Heard learned standing counsel for the revisionist and Sri Ashok Kumar, advocate, for the assessee. M/s. Rotomack Finance Private Ltd. with its office at 201, City Center, 62/2, the Mall Kanpur (hereinafter referred to as "dealer") entered into an agreement on February 29, 1996 with M/s. M.M. Plastics Private Ltd. for transfer of right to use certain machines. The dealer for discharge of his contractual obligation imported certain machines for M/s. Mafat Lal Micro Machin, Ahmedabad and leased out the same to M/s. M.M. Plastics Private Ltd., on a quarterly lease rent of Rs. 5,45,837. In the assessment year 1999-2000 dealer received Rs. 22,10,640 towards lease rent. It claimed exemption from tax on the aforesaid amount/rent under section 3F of the Central Sales Tax Act, 1956 (hereinafter referred to as "the Act, 1956"). The assessing authority took the view that the contract for transfer of right to use machines was executed at Kanpur, which is a separate transaction, and import of machine from outside of the State is a separate transaction. The dealer transferred the machine with right to use the same at Kanpur on a lease rent of Rs. 54,57,837 per quarter, which being independent transaction is taxable under section 3F of the Act, 1956. The assessing authority accordingly determined the tax liability to Rs. 1,09,167.40 vide order dated March 18, 2002.

The dealer preferred Appeal No. of 2002 which was dismissed by the Joint Commissioner (Appeal) II, Trade Tax, Kanpur vide order dated August 27, 2003. Aggrieved thereto, it preferred Second Appeal No. 476 of 2003 before the Trade Tax Tribunal, Kanpur Bench, First Kanpur (for short "the Tribunal"). The Tribunal has allowed the appeal vide order dated December 9, 2004, hence the Revenue has come in this revision.

The question is whether transaction in question of dealer is taxable under section 3F or the dealer is entitled to exemption under section 3F(2)(B)(1) of the Act, 1956.

Before considering the aforesaid question, it would be appropriate to consider certain provisions including section 3F of the Act, 1956.

The term "goods" as defined under section 2(d) of Act, 1948 reads as under:

"(d) ''Goods'' means every kind or class of movable property and includes all materials, commodities and articles involved in the execution of a works contract, and growing crops, grass, trees and things attached to, or fastened to anything permanently attached to the earth which, under the contract of sale, are agreed to be severed but does not include actionable claims, stocks, shares, securities or postal stationery sold by the Postal Department."

Similarly definition of "dealer" is contained in section 2(c) which includes a person who carries on the business of transfer of right to use any goods relevant for the purpose of this case reads as under:

"(c) ''Dealer'' means any person who carries on in Uttar Pradesh (whether regularly or otherwise), the business of buying, selling, supplying or distributing goods directly or indirectly, for cash or deferred payment or for commission, remuneration or other valuable consideration and includes--

(i) to (vii)...

(viii) every person who carries on business of transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;"

Term "sale" has also been defined in section 2(h) and the relevant point for my purpose reads as under:

"''Sale'', with its grammatical variations and cognate expressions, means any transfer of property in goods (otherwise than by way of a mortgage, hypothecation, charge or pledge) for cash or deferred payment or other valuable consideration, and includes.

(i) to (iii)...

(iv) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;"

The Explanation I-(ii) to "sale" reads as under:

Explanation I.--(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 agreement for the lease has been entered into outside the State or that the goods have been delivered to the lessee outside the State."

There are three more terms defined in section 2(o), 2(p) and 2(q), i.e., "lease", "lessee" and "lessor" which may also be noted here as under:

"(o) ''lease'' means any agreement or arrangement whereby the right to use any goods for any purpose is transferred by one person to another (whether or not for a specified period) for cash, deferred payment or other valuable consideration without the transfer of ownership and includes a sublease but does not include any transfer on hire purchase or any system of payment by installments;

(p) ''lessee" means any person to whom the right to use any goods for any purpose is transferred under a lease;

(q) ''lessor" means any person by whom the right to use any goods for any purpose is transferred under a lease."

Then section 3F deals with the tax on the right to use any goods involved in the execution of its contract. Sub-sections (1) and 2(a) of section 3F which are relevant in this case are reproduced as under:

"3F. Tax on the right to use any goods or goods involved in the execution of works contract.--(1) Notwithstanding anything contained in section 3A or section 3AAA or section 3D but subject to the provisions of sections 14 and 15 of the Central Sales Tax Act, 1956, every dealer shall, for each assessment year, pay a tax on the net turnover of--

(a) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; or

(b) transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract,

at such rate not exceeding twenty per cent as the State Government may, by notification, declare and different rates may be declared for different goods or different classes of dealers.

(2) For the purposes of determining the net turnover referred to in sub-section (1), the following amounts shall be deducted from the total amount received or receivable by a dealer in respect of a--

(a) transfer referred to in clause (a) of sub-section (1), whether such transfer was agreed to during that assessment year or earlier,--

(i) the amount representing the sales value of the goods covered by sections 3, 4 and 5 of the Central Sales Tax Act, 1956;

(ii) the amount representing the value of the goods exempted under section 4;

(iii) the amount received as penalty for default in payment or as damages for any loss or damage caused to the goods by the person to whom such transfer was made."

A simple reading of the above provisions clearly show that it is transfer of right to use any goods in the State which is the taxable incident under the aforesaid provisions. However, this aspect has been considered by a Constitution Bench of the apex court with respect to similar statutes of various States including the State of U.P. Therefore, it would be useful to look into the aforesaid decision, namely, 20th Century Finance Corpn. Ltd. and Another Vs. State of Maharashtra, ; AIR 2000 SC 2436. After addressing entire history of certain amendments in the Constitution, as also State legislation in respect of sale or purchase of goods, the court observed that, by virtue of entry 92A, List I, Seventh Schedule of the Constitution, the Parliament has power to legislate in regard to taxes on sales or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. Article 269 provides for levy and collection of such taxes. Constitutional provisions restrict State legislative authority to enact law, imposing tax on the transaction of transfer of right to use any goods, which take place in the course of inter-State trade or commerce. Moreover, vide article 286(1) of the Constitution, the State Legislature is precluded to make law imposing tax on the transactions of transfer of right to use any goods where such deemed sales takes place (a) outside the State and (b) in the course of import of goods into the territory of India. There are some other limitations on the taxing power of the State Legislature by article 286(3) of the Constitution. In respect to inter-State trade or commerce the situs of sale or purchase is wholly immaterial. The State Legislature cannot by law, treat sales outside the State and sales in the course of import as "sales" within the State by fixing the situs of sales within its State in the definition of "sale" as it is within the exclusive domain of Parliament to fix the location of sale by creating legal fiction or otherwise. The situs of sale can only be fixed by the appropriate Legislature.

There can be various principles to determine situs of sale. Certain views expressed in some earlier judgments of apex court are noticed in 20th Century Finance Corpn. Ltd. and Another Vs. State of Maharashtra, ; AIR 2000 SC 2436 and they are (1) where the goods are delivered for consumption, (2) where the contract is concluded, (3) where the goods are sold or delivered, and (4) where the essential ingredients which complete a sale, are found in majority.

The court held, where the situs of sale has been provided by legal fiction created by State Legislature, there is no difficulty. However, in the Act 1956 since Parliament has not fixed location of sale in case of transfer of right to use, by creating any fiction, that situation is not available. In the circumstances, the court proceeded to find out answer in view of various binding precedents on the subject as discussed above.

Referring to its earlier decision in Indian Copper Corporation Ltd. Vs. The State of Bihar and Others, and A.V. Thomas and Co. Ltd. Vs. Deputy Commissioner of Agricultural Income Tax, ; AIR 1964 SC 569, the court said that the aforesaid decisions unambiguously lay down, where situs has not been fixed or covered by any legal fiction created by appropriate Legislature, the location of sale would be a place, where property in goods passes. It is the passing of property within the State that was intended to be fastened for the purpose of determining whether the sale was inside or outside the State. Having said so the court further said as under:

"We, therefore, find that the location or delivery of goods within the State cannot be made a basis for levy of tax on sales of goods. Under general law, merely because the goods are located or delivery of which has been effected for use within the State would not be the situs of deemed sale for levy of tax if the transfer of right to use has taken place in another State. Therefore, the contention, on behalf of the respondents that there would be no completed transfer of right to use goods till the goods are delivered is to prevail, then the respondents are further required to show that the contract of transfer of right to use goods is also entered into in the said State in which the goods are located or delivered for use. The State cannot levy a tax on the basis that one of the events in the chain of events has taken place within the State. The delivery of goods may be one of the elements of transfer of right to use, but the same would not be the condition precedent for a contract of transfer of right to use goods. Where a party has entered into a formal contract and the goods ate available for delivery irrespective of the place where they are located, the situs of such sale would be where the property in goods passes, namely, where the contract is entered into."

The Tribunal has considered the question whether there was any inside sale or not, in the light of relevant facts as noticed above and applying the dictum laid down and discussed above, has found that no transfer of right to use the goods had taken place inside the State of U. P. and on the contrary, it has taken place outside U. P., which view, I find myself in entire agreement. Learned standing counsel could not point out any manifest, legal or otherwise error in the view taken by the Tribunal, so as to persuade the court to take a different view. I, therefore, find no justification to interfere with the view taken by the Tribunal in the impugned order.

The aforesaid question of law as formulated above is, thus answered against the Revenue and in favour of the dealer. The revision is hereby dismissed.