Sandan Vikas (India) Limited vs The State of Haryana and Others

Adarsh Kumar Goel, J.—This petition seeks quashing of Section 2(gg) and 2(j) read with note 4 of the Haryana General Sales Tax Act, 1973 (hereinafter referred to as "the Act") as amended.

Case of the Petitioner is that it took some machinery on lease at Delhi which was treated as part of turn over on the ground that the said machinery was in the State of Haryana at time of its use and thus could be subjected to tax in the State of Haryana u/s 2(j)(iv) read with note 4 of the Act. The finding recorded by the revisional authority to this effect is as under:

Regarding illegality mentioned at Serial No. 2 the dealer/counsel has submitted that the leased machinery were taken on hire from a company outside the State of Haryana and the transactions being interstate could not be taken as the purchases made in the State of Haryana. There is no force in the contention of the dealer in this regard because since the right to use of the machinery has been transferred only when these machineries were acquired by the lessee (dealer) in the State of Haryana hence the purchases on account of hiring the machinery could not at all be said to be covered u/s 3 of the CST Act, 1956. Reliance is placed on the ruling of Hon''ble Supreme Court of India dated 17.11.92 in the case of M/s Gannon Dunkerley & Co. and Ors. v. the State of Rajasthan. Thus the lease rents paid on the machinery which were used in the State of Haryana are the purchases made in the State of Haryana in the light of the provisions of Section 2(j)(iv) read with note No. 4 of the HGST Act, 1973.

Aggrieved by the above, Petitioner filed this writ petition challenging the validity of Section 2(j) (iv) read with note 4 of the Act. The said provision is as under:

Section 2(j) "Purchase"

with all its grammatical or cognate expressions means the acquisition of goods for cash or deferred payment of other valuable consideration otherwise than under a mortgage, hypothecation, charge or pledge and includes:

(i) xx xx xx

(ii) xx xx xx

(iii) xx xx xx

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

(v) xx xx xx

Note1 xx xx xx

Note2 xx xx xx

Note3 xx xx xx

Note 4 A purchase falling under Sub-clause (iv) shall be deemed to have taken place within the State if the goods in respect of which right to use has been transferred are within the State at the time of their use.

Contention raised in the writ petition is that the impugned provisions to the extent it seeks to tax transaction of purchase taking place outside the State is invalid. By merely incorporating a deeming fiction to include a purchase taking place outside the State as having taken place in the State if the goods are in the State at the time of use, the State Legislature cannot extend its legislative competence with reference to Entry 54 of List II 7th Schedule.

In the reply filed, the stand taken by the State is that if the goods are being used in the State, the same can be subjected to tax under the impugned provisions irrespective of the location where the transaction was entered.

We have heard learned Counsel for the parties.

Learned Counsel for the Petitioner submits that issue has been considered by Hon''ble Supreme Court in 20th Century Finance Corporation Ltd. and Anr. v. State of Maharashtra (2000) 119 Sale Tax Cases 182 and it was held that taxable event of transfer of right to use any goods takes place at the place where the transaction is entered and not the place where the delivery or use takes place. It is submitted that u/s 4(2)(a) of the Central Sales Tax Act, 1956 transaction can be held to have been taken place inside the State if goods are not in the State at the time the contract is entered into. If the goods are not in the State at the time the contract is entered into, the sale cannot be deemed to have been taken place inside the State. The said provision read with Article 286 of the Constitution excludes competence of State Legislature to enact a contrary provision.

Learned Counsel for the State supports the impugned provisions and the order passed with reference thereto.

After consideration of rival submissions, we are of the view that this petition is to be allowed. The deeming provision enacted by the State Legislature is in conflict with Section 4(2)(a) of the Central Sales Tax Act, 1956. The matter is covered by the judgment of Hon''ble Supreme Court in 20th Century Finance Corporation Ltd. wherein it was observed:

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 or 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 are available for delivery irrespective of the place where they are located, the situs of such would be where the property in goods passes, namely, where the contract is entered into.

The next question that arises for consideration is, where is the taxable event on the transfer of the right to use any goods. Article 366(29A)(d) empowers the State Legislature to enact law imposing sales tax on the transfer of the right to use goods. The various sub-clauses of Clause (29A) of Article 366 permit the imposition of tax thus: Sub-clause (a) on transfer of property in goods; Sub-clause (b) on transfer of property in goods; Sub-clause ( c) on delivery of goods; Sub-clause (d) on transfer of the right to use goods; Sub-clause (e) on supply of goods; and Sub-clause (f) on supply of services. The words "and such transfer, delivery or supply...." in the latter portion of Clause (29A), therefore, refer to the words transfer, delivery and supply, as applicable, used in the various sub-clauses. Thus, the transfer of goods will be a deemed sale in the cases of Sub-clauses (a) and (b), the delivery of goods will be a deemed sale in case of Sub-clause ( c), the supply of goods and services respectively will be deemed sales in the cases of Sub-clauses (e) and (f) and the transfer of the right to use any goods will be a deemed sale in the case of Sub-clause (d). Clause 29(A) cannot, in our view, be read as implying that the tax under Sub-clause (d) is to be imposed not on the transfer of the right to use goods but on the delivery of the goods for use. Nor, in our view, can a transfer of the right to use goods in Sub-clause (d) of Clause (29A) be equated with the third sort of bailment referred to in "Bailment" by Palmer, 1979 edition, page 88. The third sort referred to there is when goods are left with the bailee to be used by him for hire, which implies the transfer of the goods to the bailee. In the case of sub-clause(d), the goods are not required to be left with the transferee. All that is required is that there is a transfer of the right to use the goods. In our view, therefore, on a plain construction of Sub-clause (d) of Clause (29A), the taxable event is the transfer of the right to use the goods regardless of when or whether the goods are delivered for use. What is required is that the goods should be in existence so that they may be used. And further contract in respect thereof is also required to be executed. Given that, the locus of the deemed sale is the place where the right to use the goods is transferred, where the goods are when the right to use them is transferred is of no relevance to the locus of the deemed sale. Also of no relevance to the deemed sale is where the goods are delivered for use pursuant to the transfer of the right to use them, though it may be that in the case of an oral or implied transfer of the right to use goods, it is effected by the delivery of the goods.

Referring the impugned provision in note 4, it was observed:

Note 4 is substantially akin to explanation impugned in the Maharashtra Act. Note 4 widens the ambit of definition of "sale" by including outside sale, inter-State sale and import into the territory of India. Following the reasoning given earlier, we direct that Note 4 to Section 2 (1) of the Act shall be read down to this effect that it would not be applicable to the transactions 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 the territory of India and (iii) an inter-State sale.

In view of the judgment of Hon''ble Supreme Court in 20th Century Finance Corporation Ltd. note 4 cannot be held to be applicable to transfer of right of use of goods outside the State of Haryana merely because the goods are within the State at the time of use when such goods are not in the State at the time of transaction. Accordingly, the writ petition is allowed and the impugned order dated 23.4.1993 Annexure P-4 to the extent of including in turn over transaction taking place outside the State of Haryana is quashed.