Karnataka High Court
Binani Industries Limited vs Assistant Commissioner Of Commercial ... on 2 August, 2001
Equivalent citations: ILR2002KAR4751, [2003]129STC199(KAR)
Author: R.V. Raveendran
Bench: R.V. Raveendran
ORDER R.V. Raveendran, J.
The petitioners in these petitions are all registered dealers/non-resident dealers under the Karnataka Sales Tax Act, 1957 ("Act" or "K.S.T. Act", for short) who, inter alia, are engaged in the business of leasing machinery, equipment and motor vehicles. These petitions relate to challenge to the constitutional validity and/or interpretation of Section 5C of the Act, the validity and effect of circulars dated April 12, 1996 and October 23, 1999 issued by the Commissioner of Commercial Taxes clarifying the effect of Section 5C, and the consequential orders of assessment, proposition notices/show cause notices issued by the assessing and revisional authorities. As these cases involve common questions of law they have been heard together and disposed of by this common order.
Re : W.P. No. 4913 of 2000 :
2. Petitioner in W.P. No. 4913 of 2000 is a registered dealer under the Karnataka Sales Tax Act, 1957 ("Act", for short). It is engaged in the activity of leasing machinery, motor vehicles, etc. The activity involves transfer of right to use the goods by the petitioner to others. The act of such transfer of right to use goods is under agreements which for convenience may be called as leasing agreements. Petitioner claims that in regard to assessment period from January 19, 1999 to March 31, 1999, petitioner declared its turnover and claimed exemption in regard to leasing (transferring the right to use) of goods purchased from registered dealers in Karnataka. It is stated an assessment order was passed on August 25, 1999 concluding the assessment granting exemption in regard to such turnover. The revisional authority (fourth respondent) issued a show cause notice dated November 27, 1999 under Section 21(4) of the Act proposing to revise the assessment order dated August 25, 1999 and proposing to subject the turnover relating to lease rent received by the petitioner on the ground that levy of tax under Section 5C is a multi-point levy and the benefit of exemption is not available in regard to lease rent received by leasing of goods, even if such leased goods were purchased from registered dealers in Karnataka ; and that if the same goods are leased more than once, each transaction of lease would attract levy of tax. The said notice is apparently based on circular dated October 23, 1999 issued by the Commissioner of Commercial Taxes clarifying that the tax leviable under Section 5-C of the Act is a multi-point tax and the benefit of exemption in regard to goods purchased from the registered dealers is not available to transactions under Section 5-C of the Act. Feeling aggrieved, the petitioner has filed this petition for the following reliefs :
"(i) for a declaration that Section 5-C being subject to Section 5(6) of the Act, exemption under Rule 6(4)(i) of the Karnataka Sales Tax Rules, 1957 is applicable to transactions under Section 5-C, relating to goods purchased from registered dealers in Karnataka.
(ii) for a declaration that the taxable turnover under Section 5-C has to be determined in accordance with Rule 6(4) of the Rules.
(iii) for quashing of the notice dated November 27, 1999 issued by the fourth respondent."
Re : W.P. Nos. 2028, 2192-2195 of 2000, 7267 of 2000, 13082 of 2001 and 13084 of 2001.
3. In all these petitions the main prayer relating to Section 5-C is the same as the prayer in W.P. No. 4913 of 2000. In addition the petitioners in W.P. Nos. 2028, 2192-2195 of 2000 have sought quashing of notices dated December 20, 1998, the petitioner in W.P. No. 13082 of 2001 has sought quashing of notice dated February 14, 2001 and petitioner in W.P. No. 13084 of 2001 has sought quashing of notice dated February 20, 2001.
Re : W.P. Nos. 1323 to 1327 of 2000 :
4. The petitioner is a non-resident dealer engaged in the business of leasing equipment/machinery. It has filed these petitions for the following reliefs : (i) quashing the notice dated December 23, 1999 issued by first respondent based on the circular dated October 23, 1999 issued by the first respondent ; and (ii) for quashing the show cause notices dated December 30, 1999 issued under Section 21(4) of the Act proposing to revise the orders of assessment for the period 1994, 1995 to 1998 and 1999.
Re : W.P. No. 5282 of 2000 :
5. The petitioner is a registered dealer engaged in the business of hire-purchase finance and leasing of equipment. It has filed this petition : (i) for quashing the proposition notice dated January 22, 2000 for the year 1998-99 proposing to subject to tax, lease rentals even if the leased machinery were tax suffered goods ; and (ii) to strike down Section 5-C of the Act as unconstitutional or in the alternative read down Section 5-C as excluding multi-point levy of tax in respect of tax suffered goods, Re : W.P. Nos. 13585-13594 of 2000, 13598 of 2000 and 23378 of 2000 :
6. The petitioners have sought relief regarding Section 5-C similar to what is sought in W.P. No. 5282 of 2000. In addition the petitioners in W.P. Nos. 13585-13594 of 2000 have sought quashing of notices dated March 3, 2000, the petitioner in W.P. No. 13598 of 2000 has sought quashing of notice dated December 23, 1999 and petitioner in W.P. No. 23378 of 2000 has sought quashing of assessment order dated March 30, 2000 and notice dated March 30, 2000.
Re : W.P. Nos. 22339-22341 of 2001 :
7. The petitioner is a non-resident dealer engaged in the business of leasing equipment. Petitioner has filed these petitions for the following reliefs : (i) for quashing the assessment orders dated March 31, 2000, March 31, 2000 and March 29, 2001 and consequential demand notices dated April 15, 2000, April 15, 2000 and March 31, 2001 for the years 1995-96, 1996-97 and 1997-98 ; and (ii) to read down Section 5-C so that it will not be applicable to transactions of transfer of right to use any goods if such deemed sale is (a) an outside sale ; (b) a sale in the course of import or export ; and (c) an inter-State sale.
Re : W.P. Nos. 8122-8123 of 2001 :
8. The petitioner is a non-resident dealer engaged in the business of leasing equipment, has filed these petitions for the following reliefs : (i) for quashing the orders of assessment dated May 9, 2000 and May 10, 2000 (as also consequential notices of demand dated May 10, 2000 and May 12, 2000) in regard to assessment years 1996-97 and 1997-98 wherein the transactions relating to leasing of equipment purchased from registered dealers have been subject to tax under Section 5-C of the Act ; and (ii) for striking down Section 5-C or alternatively to read down the section as excluding multi-point levy of tax in respect of tax suffered goods.
Re : W.P. No. 27327 of 2001 :
9. The petitioner has sought (i) striking down Section 5-C or alternatively to read down the section as excluding multi-point levy of tax in respect of tax suffered goods and (ii) quashing of notice dated April 18, 2001.
Statutory and factual background :
10. Clause (3) of article 246 of the Constitution provides that subject to Clauses (1) and (2), the Legislature of any State has exclusive power to make laws for such State or any part thereof with respect to any of the matters enumerated in List II (State List) in the Seventh Schedule. Item 54 of the State List enables the Legislature of a State to make laws for the State relating to taxes on the sale or purchase of goods (other than newspapers) subject to provisions of entry 92-A of List I. The Karnataka Sales Tax Act, 1957 has been enacted in exercise of the power under entry 54 of the State List.
11. In a series of decisions, the Supreme Court had held that the expression "sale" in entry 54 has been used in the sense in which it is used in Section 4 of the Sale of Goods Act, 1930, and tax leviable under entry 54 must relate to "sale" according to established concept of "sale" and State Legislatures have no power to tax transactions which are not "sales", by deeming them to be "sales" by enlarging the definition of "sale". The Karnataka Sales Tax Act as originally enacted in the year 1957 therefore referred to "sale" with its normal meaning derived from Section 4 of the Sale of Goods Act. Section 5 which is the charging Section was also worded with reference to "sale" as per its general definition traceable to the Sale of Goods Act. Such position continued till insertion of Clause (29A) in article 366 by the Constitution (46th Amendment) Act, 1982, defining the term "tax on the sale or purchase of goods" as follows :
"(29A) 'Tax on the sale or purchase of goods' includes-
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration ;
(b) and (c).................
(d) a tax on the 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 ;
(e) and (f).................
and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made."
Simultaneously Clause (3) of Article 286 was substituted, providing that any law of a State shall, in so far as it imposes, or authorises the imposition of, a tax on the sale or purchase of goods, being a tax of the nature referred to in Sub-clause (d) of Clause (29A) of Article 366, be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify.
12. By expanding the definition of the term "tax on sale or purchase of goods" in Clause (29A) of Article 366, the State Legislatures which till then had the power to tax only sales or purchases (absolute sales/purchases) under entry 54 of State List were enabled to tax other forms of transactions including transfers of right to use goods which were deemed sales. In view of the widening of its power under entry 54 of the State List, the State Legislature amended the KST Act redefining the term "sale" in Section 2(l)(t) and the term "dealer" in 2(k) by Amendment Act No. 27 of 1985 with effect from August 1, 1985, so as to bring them in conformity with the widened definition of the term "tax on sale or purchase of goods" in the Constitution. The term "sale" in Section 2(l)(t) of the KST Act as amended by the Karnataka Act No. 27 of 1985 means every transfer of the property in goods (other than by way of a mortgage, hypothecation, charge or pledge) by one person to another in the course of trade or business, and, inter alia, includes a transfer of the right to use any goods for any purpose (whether or not for a specific period), for cash, deferred payment or other valuable consideration.
13. Simultaneously, an independent charging section (Section 5-C) was also inserted by Act No. 27 of 1985 with effect from April 1, 1986, empowering the State to levy tax on the transfer of the right to use any goods, as follows :
"Notwithstanding anything contained in Sub-section (1) or Sub-section (3) of Section 5, but subject to Sub-sections (5) and (6) of the said section, every dealer shall pay for each year a tax under this Act on his taxable turnover in respect of the transfer of the right to use any goods mentioned in column (2) of the Seventh Schedule for any purpose (whether or not for a specified period) at the rates specified in the corresponding entries in column (3) of the said Schedule."
14. Section 5-C was amended by Act No. 4 of 1992 (which came into force on April 1, 1992) substituting the word "total turnover" in place of the words "taxable turnover", such substitution being deemed to be with effect from April 1, 1986. The validity of Section 5-C as amended by Act No. 4 of 1992 was challenged before this Court in a batch of writ petitions. This Court, by its judgment dated November 21, 1995 [Shetty Leasing (India) Ltd. v. Union of India reported in [1996] 100 STC 533] declared that Section 5-C as amended by Act No. 4 of 1992 was unconstitutional and void since it provided for levy of tax on the total turnover relating to the transfer of the right to use goods which includes inter-State sales, export sales and sales outside the State.
15. Thereafter, the State Legislature, by Amendment Act No. 5 of 1996 again substituted Section 5-C with retrospective effect from April 1, 1986, The section so substituted is the same as what was originally inserted by Act No. 27 of 1985, without the amendment made by Act No. 4 of 1992. The validity of Section 5-C as substituted by Act No. 5 of 1996 came up for consideration before this Court in India Equipment Leasing Ltd. v. Deputy Commissioner of Commercial Taxes reported in [1998] 111 STC 403. A learned single Judge of this Court has upheld the constitutional validity of the section.
16. Immediately after substitution of Section 5-C by Act No. 5 of 1996, the Commissioner of Commercial Taxes issued a circular dated April 12, 1996 clarifying the position in regard to the newly substituted Section 5-C as follows :
"16. Section 5-C in force prior to this amendment prescribed 'total turnover' as the basis for levy of tax. The High Court of Karnataka in the judgment rendered in the case of Shetty Leasing (India) Ltd. v. Union of India [1996] 100 STC 533, had struck down Section 5-C as beyond the competence of State Legislature. The amendment now introduced substitutes the whole of Section 5-C with retrospective effect from April 1, 1986 so as to overcome the aforesaid judgment. The newly substituted section prescribed 'taxable turnover' as the basis for levy of tax. Assessments, if any, completed adopting the basis of 'taxable turnover' for levy of tax, stand automatically validated by the validation clause at Section 7 of the Amendment Act. In all such cases, it would be in order for the assessing authorities to pursue action to realisation of the taxes levied by issuance of simple notices, without going in for rectifications, reassessments or revisions.
17. Computation of taxable turnover for the purposes of Section 5-C now substituted, would have to be in accordance with the provisions of Rule 6(4) of the KST Rules, 1957. Accordingly, among other things, where goods, e.g., motor vehicles, machinery, etc., specified in the Second Schedule are purchased from registered dealers in Karnataka and are given on lease, such lease involving transfer of the right to use the KST suffered goods would be eligible for exemption in terms of Clause (i) of Sub-rule (4) of Rule 6.
18. All the 15 categories of goods specified in the Seventh Schedule are made liable to tax at the uniform rate of 4 per cent."
The effect of the clarification by the said circular was that if the goods, in respect of which the right to use is transferred had been subjected to tax under Section 5(3)(a), then no tax need be paid under Section 5-C in regard to such transactions relating to transfer of the right to use tax suffered goods. The assessing authorities accordingly proceeded to complete pending assessments of various assessees for several years by applying the said clarification contained in the circular dated April 12, 1996,
17. Three and a half years later, the Commissioner of Commercial Taxes issued another circular dated October 23, 1999 stating that on review it was noticed that the earlier circular dated April 12, 1996, did not state the correct position of law in regard to Section 5-C of the Act for the following reasons :
"(i) There is a distinction between a contract of sale as defined in Section 4 of the Sale of Goods Act, 1930 and a transfer of the right to use goods for any purposes. While in a transaction of 'sale' as defined under the Sale of Goods Act, there is transfer of ownership in goods and in a transaction involving transfer of the right to use goods, there is no such transfer of ownership in goods. Consequent to insertion of Clause (29A)(d) to Article 366 of the Constitution of India by 46th Amendment to the Constitution, Karnataka Sales Tax Act, 1957 was amended with effect from April 1, 1986 to treat the transfer of the right to use goods as deemed sale for the purposes levy of tax on such transaction.
(ii) Section 5-C of the Karnataka Sales Tax Act, 1957 is an independent charging section. Section 5-C contemplates levy of tax on taxable turnover in respect of transfer of the right to use any goods specified in Seventh Schedule of the Act for any purposes (whether or not for specified period). There is nothing in Section 5-C to indicate that the goods which are subject to tax on their transfer of the right to use (lease) cannot be subject to tax under Section 5-C when right to use such goods are again transferred after the expiry of the specified period for which it was hired earlier. Therefore the levy under the said provision is multi-point in nature. The very goods when leased out more than once, such transaction attract levy every time they are leased out.
(iii) As the Section 5-C starts with non obstante clause, namely, 'notwithstanding anything contained in Sub-section (1) or Sub-section (3) of Section 5', the goods in respect of which right to use goods is transferred even though have been subjected to tax under the said sub-sections of Section 5 they shall be liable to tax under Section 5-C. In other words, the goods which have suffered tax under Section 5 are not excluded from the purview of Section 5-C when right to use of such goods are transferred."
As a consequence, the Commissioner issued the following revised instructions to be followed by the assessing authorities and revisional authorities :
"(i) Section 5-C was substituted retrospectively with effect from April 1, 1986 by amending Karnataka Sales Tax Act, 1957 by Karnataka Taxation Laws (Second Amendment) Act, 1996. The newly substituted Section 5-C provides for levy of tax on the 'taxable turn-over' in respect of transfer of the right to use any goods specified in the Seventh Schedule to the Act for any purposes (whether or not for specified period).
(ii) The tax under Section 5-C shall be levied on taxable turnover in respect of transfer of the right to use any goods specified in the Schedule notwithstanding that such goods have already been subjected to tax under any of the provisions of the Act including Section 5-C.
(iii) In determining the taxable turnover for the purposes of Section 5-C the amounts for which the goods whose right to use is transferred have been purchased from another registered dealer liable to pay tax under Sub-section (1) or Sub-section (3) of Section 5, shall not be deducted from the total turnover determined.
(iv) Assessments if any, completed before April 1, 1996 adopting the basis of 'taxable turnover' for levy of tax stand automatically validated by the validation clause at Section 7 of the Amendment Act.
(v) Assessments if any completed by allowing the deductions of the amounts relatable to goods purchased from another registered dealer liable to tax, such assessments shall be referred to the ; concerned Joint Commissioner of Commercial Taxes (Administration) immediately for initiating action under Section 21 to revise the assessment order in accordance with these instructions.
(vi) Where any order passed under Section 21 or appeal order under Section 20 is contrary to instructions issued in this circular such orders shall be referred to the Commissioner immediately for initiating action under Section 22A."
18. In view of the instructions contained in the circular dated October 23, 1999, action has been taken by the assessing authorities under Sections 12(3) or 12A or 25A or by the revisional authorities under Section 21 or under Section 22A of the Act and by the Intelli-gence Wing of the Commercial Tax Department under Sections 29 and 31 of the Act. In some cases, on the basis of the proposition notices issued under Section 12(3) of the Act, the assessing authorities have completed the assessments also on the basis of new circular dated October 23, 1999. At that stage, the petitioners have filed these petitions and several other batches which are being disposed of by separate orders challenging the validity of Section 5-C, new circular dated October 23, 1999, consequential notices and the action taken by the assessing authority/revisional authority or other authority in pursuance of the instructions contained in the new circular dated October 23, 1999.
19. On the contentions urged, the following three points arise for consideration :
"(i) Whether Section 5-C of the Act is unconstitutional and void on account of failure to obtain previous sanction of the President under Article 304(b) of the Constitution ?
(ii) If Section 5-C is valid, what is its true effect and whether it is correctly interpreted in the circular dated April 12, 1996 or in the circular dated October 23, 1999 ?
(iii) What is the effect of Commissioner's circular No. 5/1996-97, dated April 12, 1996 and the subsequent circular No. 31/1999-2000 dated October 23, 1999 ?"
Re : Point No. (i) :
20. The first contention is that Section 5-C is invalid for want of previous sanction of the President under Article 304(b). The peti-tioners contend that Section 5-C imposes restrictions on the freedom of trade, commerce and intercourse within the State, and even if it is held to be a reasonable restriction, the amendment to an Act for inserting such a provision can be introduced or moved in the Legis-lature only with the previous sanction of the President. It is pointed that while the KST Act has received the assent of the President, Amendment Act No. 5 of 1996 was not moved in the State Legislature with the previous sanction of the President and therefore, Section 5-C as substituted/inserted by Act No. 5 of 1996 is unconstitutional.
21. The validity of Section 5-C has been upheld by this Court in India Equipment Leasing Ltd. [1998] 111 STC 403. Therefore, the petitioners cannot re-agitate the question of constitutional validity of Section 5-C. Even assuming that the petitioners can challenge Section 5-C on the ground that the decision in India Equipment Leasing Ltd. did not consider the validity of the Section 5-C with reference to the contention now urged, the position would be no different in regard to the validity of Section 5-C.
22. Article 301 provides that subject to other provisions of Part XIII of the Constitution, trade, commerce and intercourse throughout the territory of India shall be free. Article 303 places certain restrictions on the legislative power of the Union and the States with regard to trade and commerce. Article 304(b) provides that notwithstanding anything in Article 301 or Article 303, the Leg-islature of a State may by law, impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest. The proviso to Article 304 however states that no Bill or amendment for the purpose of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President.
23. The argument of the petitioners is on the premises that introduction of a new provision as per Section 5-C under the KST Act amounts to a restriction on the freedom of trade, commerce or intercourse within the State. If a provision amounts to a "restriction", to be valid, it should be a reasonable restriction and the Bill or the amendment should have been moved in the Legislature with, the previous sanction of the President. But, if the Bill or the amendment does not amount to a restriction on the freedom of trade, commerce or intercourse, then Article 301 will not apply and consequently it will not be necessary to obtain the previous sanction of the President under Article 304(b) to move an amendment in the Legislature of the State.
24. Tax laws are not outside the purview of Article 301. But it is now well-settled that there will be a violation of the freedom guaranteed by Article 301 only where a legislative Act operates to restrict free-flow or movement of trade, commerce or intercourse, directly and immediately, as distinct from creating some indirect or inconsequential impediment which may be regarded as remote. Therefore a sales tax may have to be justified as a reasonable restriction under Article 304(b) only if it is challenged as being so excessive that it really operates as a restriction upon the movement of goods or imposes a burden upon the instrumentalities of commerce or activities which are an integral part of the flow of commerce in such a manner that it must be held to be direct and immediate restriction upon the freedom of trade and commerce.
24. 1. In State of Kerala v. A.B. Abdul Kadir , the Supreme Court held that imposition of a tax in every case would not be tantamount per se to an infringement of Article 301. The Supreme Court observed :
"................it is well-established by numerous authorities of this Court that only such restrictions or impediments which directly or immediately impede the free-flow of trade, commerce and intercourse fall within the prohibition imposed by Article 301. A tax may in certain cases directly and immediately restrict or hamper the flow of trade, but every imposition of tax does not do so. Every case must be judged on its own facts and in its own setting of time and circumstances."
24.2. In Vrajlal Manilal & Co. v. State of Madhya Pradesh , the Supreme Court examined the question whether taxing the sales and purchases of tendu leaves at a higher rate than in the neighbouring States violated Article 301 by impeding free trade and commerce in tendu leaves throughout the territory of India. The Supreme Court negatived the contention. While doing so, it observed :
"An increase in the rate of tax on the sales and purchases of tendu leaves would necessarily result in an increase in the cost of manufacture of bidis and consequently in their sale price. An increase in the rate of tax on a particular commodity cannot per se be said to impede free trade and commerce in that commodity There was no material before the High Court and no material before us to show that the impugned increase in the rate of tax on the sales and purchases of tendu leaves has put an end to that trade or has caused that trade to decline............"
24.3 In Video Electronics Put. Ltd. v. State of Punjab , the-Supreme Court held :
"As is manifest, Article 304 is an exception to Article 301 of the Constitution. The need of taking resort to exception will arise only if the tax impugned is hit by Articles 301 and 303 of the Constitution. If it is not, then Article 304 of the Constitution will not come into the picture at all."
24.4. The petitioners have not placed any material nor demonstrated that imposition of tax under Section 5-C imposes such a burden which can be termed as a direct and immediate restraint on the freedom of trade and commerce. Consequently, it has to be held that the amendment to the KST Act inserting Section 5-C did not require the previous sanction of the President under the proviso to Article 304(b). This answers the first point.
Re : Point No. (ii) :
25. A convenient way to begin considering the effect of Sec-tion 5-C is to refer to the decision of the Supreme Court, in 20th Century Finance Corporation v. State of Maharashtra . After considering the power of the State Legislature to tax the right to use the goods, the Supreme Court reached the following conclusions :
(a) The States in exercise of power under entry 54 of List II read with Article 366(29A)(d) are not competent to levy sales tax on the transfer of right to use goods, which is a deemed sale, if such sale takes place outside the State or is a sale in the course of inter-State trade or commerce or is a sale in the course of import or export.
(b) The appropriate Legislature by creating legal fiction can fix situs of sale. In the absence of any such legal fiction the situs of sale in case of the transaction of transfer of right to use any goods would be the place where the property in goods passes, i.e., where the written agreement transferring the right to use is executed.
(c) Where the goods are available for the transfer of right to use the taxable event on the transfer of right to use any goods is on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use.
(d) In cases where goods are not in existence or where there is an oral or implied transfer of the right to use goods, such transactions may be effected by the delivery of the goods. In such cases the taxable event would be on the delivery of goods.
(e) The transaction of transfer of right to use goods cannot be termed as contract of bailment as it is deemed sale within the meaning of legal fiction engrafted in Clause (29A)(d) of Article 366 of the Constitution wherein the location or delivery of goods to put to use is immaterial.
The Supreme Court then considered Section 5-C of the KST Act as also the definition of "sale" in Section 2(t) with reference to explanation 3(d) thereto and held as follows :
"40. A perusal of Explanation 3(d) to Section 2(t) shows that the transfer of right to use any goods would be deemed to have taken place in the State of Karnataka if the goods are for use within the State irrespective of the place where the contract of transfer of right to use the goods is executed. The said Explanation 3(d) to Section 2(t) widens the ambit of definition of 'sale' by including sales outside the State of Karnataka and the sales which occasioned import of goods into India, merely on the premise that goods put to use are located within the State of Karnataka irrespective of the place where the contract or transfer has taken place. This explanation is in excess of legislative power under entry 54 of List II of the Seventh Schedule. Another important aspect to notice is that the provision of Section 5(3) which provides for single point taxation has been omitted in its application to Section 5-C. Therefore, Explanation 3(d) to Section 2(t) of the Act has to be held in excess of legislative power conferred to the State Legislature under entry 54 of List II of the Seventh Schedule to the Constitution following the reasoning given while discussing the Maharashtra Act. We, accordingly, direct that Explanation 3(d) to Section 2(t) 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 territory of India and (iii) an inter-State sale." (Emphasis* supplied)
26. "Sales" as understood in the normal and traditional sense (that is property in the goods being transferred from the seller to the buyer), continue to be governed by the charging Section 5. The new charging provision in Section 5-C relates to the widened definition of "sale". Section 5-C levies tax on the transfer of the right to use any goods. When the definitions of "sale" and "dealer" in the Act were amended, if charging Section 5-C had not been inserted, it would have resulted in the charging provision in Section 5 also governing transactions of lease also (considered as deemed sales). That would have caused considerable confusion and incongruity as a sale which in the traditional sense refers to absolute transfer of title and ownership in the goods, is completely different from a transfer of right to use goods, which is nothing but a lease in the traditional sense. Therefore, it became necessary to introduce a new charging section to deal with transfers of right to use goods.
27. I may now refer to the need for excluding the applicability of Section 5(1) and (3) but applying Section 5(5) and (6) to Section 5-C. On account of the extended definition of "sale" in Section 2(t), the provisions of Section 5(1) and (3) would have become automatically applicable even to deemed sales involving transfer of right to use goods and would have frustrated the effect of a separate charging provision relating to transfer of right to use goods. Therefore, it became necessary to use a non obstante clause in Section 5-C to exclude the applicability of Sub-sections (1) and (3) of Section 5. But, Section 5 contains not only charging provisions, but also provisions dealing with the procedural aspects connected to assessments. Therefore, it became necessary to make applicable Sub-sections (5) and (6) of Section 5 which related to procedure.
28. I may now refer to several features which distinguishes Section 5-C from Section 5(3)(a).
28.1. The provisions of charging Section 5 applies to actual sales (absolute transfer of ownership) of both durable and consumable goods. Charging Section 5-C relates only to transfer of right to use goods (that is leases/licences/hiring) in respect of goods which are durables and not to consumables. The transfer of a right to use the goods presupposes the return of the goods to the transferor at the end of the period of use. The goods which are consumable in nature cannot obviously be returned to the transferor at the end of the period of use and therefore, necessarily cannot be the subject-matter of Section 5-C. That is why while the Second Schedule to the KST Act enumerating the goods which are subjected to tax under Section 5(3)(a) contains both consumables and durables, the Seventh Schedule to the KST Act enumerates only durables which can be subjected to a tax under Section 5-C. 28.2. In an absolute sale covered by Section 5(3)(a), there is only one transfer by the dealer. The subsequent transfers, if any, will be by other dealers who acquire or purchase the goods. A dealer does not deal with the same goods more than once. But, the dealer who carries on the business of equipment leasing, covered by Section 5-C can transfer the right to use the goods to a transferee, any number of times and there can be several successive transfers of the same goods by the same transferor (dealer) at different points of time in the case.
28.3. Section 5(3)(a) in specific terms provides that in regard to goods mentioned in the Second Schedule, only the first or the earliest of successive dealers in the State will be liable to tax under the section. The Second Schedule specifically states that it contains the list of goods on the sale of which a single point tax is leviable on the first or earliest of successive dealers in the State. Section 5(3)(a) contemplates the same goods being dealt with by different dealers and taxes only the sale by the first or earliest of successive dealers to tax, the sales by subsequent successive dealers are not subjected to tax. On the other hand Section 5-C contemplates the same dealer dealing with the same goods several times and all the transactions being subjected to tax. Neither Section 5-C nor the Seventh Schedule refers to any single point tax, but specially provides that every dealer shall pay for each year tax under the section on his taxable turnover in respect of transfer of the right to use any goods mentioned in Seventh Schedule, thereby making it clear that all transactions, whether first or subsequent, are liable to tax. That this was the position till March 31, 2000 is also evident from the proviso to Section 5-C added with effect from April 1, 2000 as follows : "provided that no tax shall be levied under this section if the goods in respect of which the right to use is transferred, have been subjected to tax under Section 5".
28.4. The concept of sale for the purpose of Section 5(1) and Section 5(3)(a) is different from the concept of sale under Section 5-C. While Section 5(1) and 5(3)(a) refers to and levies tax on sales (that is absolute transfers of all right, title and interest), Section 5-C refers to and taxes lease (or hiring) transactions relating to transfer of right to use goods which are considered as deemed sales. The subject-matter of tax under Section 5(3)(a) is the consideration for the absolute transfer. The subject-matter of tax in regard to a transaction covered by Section 5-C is the lease rent or licence fee or a charge received by the transferor for transferring the right to use goods. Further, the transfer of the right to use the goods can be for an indefinite period or for a definite period. Consideration can be a one time rent or periodical rent payable by the transferee. There can be different transfers to different transferees at different points of time.
28.5. Therefore, the principles and concepts (of sale, single point levy and multi-point levy) as understood and applicable with reference to absolute sales charged to tax under Section 5 cannot be imported or applied in respect of deemed sales (leases) covered by Section 5-C. The provisions of Section 5-C should be interpreted and applied, independently of the principles applicable to Section 5(1) or 5(3)(a).
29. Section 5-C requires every dealer to pay in each year a tax on his taxable turnover in respect of transfer of the right to use any goods mentioned in the Seventh Schedule at the rates specified in the said Schedule. The term "taxable turnover" is defined in Section 2(l)(u-l) as meaning the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed, but shall not include the turnover of purchase or sale in the course of inter-State trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India. Section 5(3)(a) deals with a situation where there may be several transfers of the same goods within the State by way of (absolute) sale and makes only the first or the earliest of successive dealers liable to tax, thereby exempting the subsequent dealers in the State from payment of tax. The concept of exempting subsequent dealers who are different from the dealer who pays the tax under Section 5(3)(a) is different from the concept of taxing the same dealer for different transactions relating to the same goods. The concept of single point levy or multi-point levy which may be applicable to Sec-tion 5(3)(a) or 5(1) will not therefore apply in regard to transactions covered by Section 5-C.
30. The first part of Section 5-C creates a liability on every dealer to pay tax on his taxable turnover in respect of the transfer of the right to use goods, notwithstanding anything contained in Sub-section (1) or Sub-section (3) of Section 5. It is thus obvious that exemption available to subsequent dealers under Section 5(3)(a) in regard to tax suffered goods specified in the Second Schedule, will not apply to transactions covered by Section 5-C. A particular goods may be found both in the Second Schedule and the Seventh Schedule. If the transaction relating to the goods is an absolute sale, then it.will be governed by the provisions of Section 5(3)(a). If the transaction is a mere transfer of right to use the goods, then the provisions of Section 5-C will apply.
31. The petitioners however contend that as the provisions of Section 5-C are made subject to the provisions of Section 5(6) which in turn requires determination of taxable turnover with reference to the Rules, Rule 6(4) will apply to assessments under Section 5-C and therefore dealers are eligible for exemption in regard to tax suffered goods under Rule 6(4)(i). It is true that Section 5-C is made "subject to Sub-Sections (5) and (6) of Section 5", Section 5(5) provides that a dealer whose total turnover in any year is less than rupees two lakhs shall not be liable to pay tax for that year. Section 5(6) provides that for the purpose of Section 5 and other provisions of the Act, the total turnover, taxable turnover or turnover shall be determined in accordance with such rules as may be prescribed. The effect of Sub-section (5) of Section 5 on Section 5-C is that even in regard to transactions which are subjected to levy under Section 5-C, if the dealer's total annual turnover is less than rupees two lakhs, he will not be liable to pay tax for that year. The effect of Sub-section (6) of Section 5 on Section 5-C is that determination of total turnover, taxable turnover or turnover under Section 5-Cshall be in accordance with the Rules including Rule 6.
32. Rule 6 of the KST Rules deals with determination of total and taxable turnover. When the KST Act was amended by Act 27 of 1985, Rule 6 was also amended by notification dated April 1, 1986. As a consequence in Sub-rule (1), enumerating the items that will go into the determination of the "total turnover" of a dealer for the purpose of the Act, the total amount paid or payable to the dealer as the consideration for transfer of the right to use any goods for any purpose (whether or not for specified period) was included vide item (d). Sub-rule (4) provides that in determining the taxable turnover, the amount specified in clauses (a) to (p) shall, subject to the conditions specified therein, be deducted from the total turnover as determined under clauses (a) to (e) of Sub-rule (1). Clause (i) of Sub-rule (4) provides for deduction of all amounts for which the goods specified in the Second, Third and Fourth Schedules are sold or purchased by a dealer when such sales or purchases are exempted from the tax leviable under any provisions of the Act. As the Second Schedule relates to Section 5(3)(a), the amounts for which any Second Schedule goods are sold by a dealer can be deducted from total turnover to arrive at taxable turnover if such sales are exempted from tax leviable under Section 5(3)(a). That is, dealers other than the first or earliest of successive dealers in the State, selling goods specified in the Second Schedule (that is transferring absolutely the property in the goods) can deduct all amounts for which they so sell the Second Schedule goods, for arriving at their taxable turnover. But, Rule 6(4)(i) does not provide for deduction of the turnover relating to leasing of goods which have suffered tax under Section 5(3)(a). Merely because some goods in the Seventh Schedule are also mentioned in the Second Schedule, it does not follow that in regard to such goods which have suffered tax under Section 5(3)(a) at the hands of the first or earliest successive dealers, tax under Section 5-C is exempted. In other words, what could be deducted under Rule 6(4)(i) is with reference to sales referred to in Section 5(3)(a) and not transactions referred to in Section 5-C. The term "taxable turnover" is not defined by Rule 6(4) of the Rules, but by Section 2(l)(u-l) of the Act, Rule 6(4) only specifies the amounts that can be deducted from the total turnover to arrive at the taxable turnover. Therefore, Rule 6(4)(i) is of no assistance to the petitioners to contend that, if the goods described in the Seventh Schedule are also described in the Second Schedule and had suffered tax in the hands of the first or earliest of successive dealers in the State, such goods cannot be subjected to tax against under Section 5-C.
33. Rule 6(4)(i) makes sense only when the words "sold" and "sales" are taken as referring to absolute sales to which Section 5(3)(a) is applicable. The effect of Rule 6(4)(i) is where the total turnover of the dealer includes the total amount paid or payable to the dealer as consideration for sales, then, the turnover relating to sales by the dealer as second and subsequent dealer of such goods described in Second Schedule will have to be deducted for arriving at the taxable turnover. The petitioners want Rule 6(4)(i) to be read as referring to lease transactions. The petitioners want to read the following into Rule 6(4)(i) :
"all amounts received or receivable in respect of goods specified in Seventh Schedule, if such goods had been purchased from regis-tered dealers liable to pay tax under the Act."
But, no amount received as consideration for leasing of any goods is exempted from tax under any of the provision of the Act. Rule 6(4)(i) cannot be interpreted as referring to lease transactions as what is mentioned is "amount received or receivable in respect of goods specified in Second, Third and Fourth Schedules" and not "Seventh Schedule". The Second, Third and Fourth Schedules relate to Section 5(3)(a), 5(3)(b) and 5(4). Therefore, it is not possible to hold that consideration received for the transaction of lease of tax suffered goods should be excluded for arriving at the taxable turnover. In fact, Rule 6 covers three types of sales, i.e., absolute sales covered by Section 5, transfer of property in goods used in works contract covered by Section 5B and transfer of right to use goods covered by Section 5-C. It would have been better if separate provisions for determination of taxable turnovers relating to works contract sales covered by Section 5B and lease transactions covered by Section 5-C had been made, as has been done, in some other States. Be that as it may. For our purpose, it is sufficient to note Rule 6 does not in any manner help the assessees to contend that the considerations received for transactions of lease are exempted from tax under Section 5-C if the goods leased had suffered tax under Section 5(3)(a).
34. This aspect had been lost sight of by the Commissioner when he issued the first circular dated April 12, 1996 immediately after reinsertion of Section 5-C by Act No. 5 of 1996. He has proceeded on the erroneous assumption that KST suffered goods specified in Second Schedule which have been purchased from registered dealers in Karnataka, when leased, are eligible for exemption in terms of Rule 6(4)(i).
35. The circular dated April 12, 1996 mixes up Section 5(3)(a) and Section 5-G though they are two different charging sections deal-ing with two different types of transfers intended to operate in two different sets of circumstances. It erroneously assumed that what could be deducted with reference to Section 5(3)(a) could also be deducted with reference to Section 5-C for arriving at the taxable turnover. It failed to notice that Section 5(3)(a) only exempted pay-ment of tax by subsequent dealers selling the KST suffered goods and it had no bearing on the independent charging Section 5-C. There is nothing in Section 5-C to exempt payment of tax under that section, in respect of KST suffered goods. When these aspects were noticed, the Commissioner has issued the second circular dated October 23, 1999. The Commissioner in the second circular has rightly pointed out that there is nothing in Section 5-C to indicate that the goods which are subject to tax on their transfer of right to use (lease) cannot be subjected to tax under Section 5-C when the right to use such goods is again transferred after the expiry of the specified period for which it was hired/leased earlier and therefore, the levy under the provisions is multi-point in nature. He has also rightly pointed out that goods which have suffered tax under Section 5(3)(a) are not excluded from the purview of Section 5-C nor exempted from tax when subjected to a transfer covered by Section 5-C. The multi-point nature of levy under Section 5-C applies even when the same goods are leased repeatedly by the same dealer to the same lessee or to different lessees for different periods and each consideration received in regard to such leases will form part of the taxable turnover of the lessor. On the other hand, under Section 5(3)(a) or 5(1) a dealer does not receive consideration more than once in regard to the same goods nor does he transfer the same goods again and again as it can happen under Section 5-C. The first part of Section 5-C, therefore, in no way helps the petitioners to contend that no tax could be levied under Section 5-C in regard to transfer of the right to use goods which have already suffered tax in the hands of first or earlier successive dealers under Section 5(3)(a). This answers the second question. The circular dated October 23, 1999 correctly interprets Section 5-C. The interpre-tation of Section 5-C and Rule 6(4)(i) in the circular dated April 12, 1996 is erroneous.
Re : Point No. (iii) :
36. The next point for consideration is the effect of the circulars dated April 12, 1996 and October 23, 1999. The Supreme Court in a series of cases has held that an interpretation of a provision in a taxing statute by the Commissioner or authority charged with executing the statute, favouring the assessee, though at variance with the true intent of a provision, is binding on the assessing authorities. We may refer to some of those decisions arising under the Income-tax Act, 1961, Central Excise Act, 1944 and sales tax laws.
36.1 In K.P. Varghese v. Income-tax Officer, Ernakulam , the Supreme Court held :
"................These two circulars of the CBDT are, as we shall presently point out, binding on the tax department in administering or executing the provision enacted in Sub-Section (2), but quite apart from their binding character, they are clearly in the nature of contemporanea expositio furnishing legitimate aid in the construction of Sub-section (2). The rule of construction by reference to contem-poranea expositio is a well-established rule for interpreting a statute by reference to the exposition it has received from contemporary authority, though it must give way where the language of the statute is plain and unambiguous. This rule has been succinctly and felicitously expressed in Crawford on Statutory Construction, 1940 edition, where it is stated in paragraph 219 that 'administrative construction (i.e., contemporaneous construction placed by adminis-trative or executive officers charged with executing a statute) generally should be clearly wrong before it is overturned ; and a construction, commonly referred to as practical construction, although non-controlling, is nevertheless entitled to considerable weight, it is highly persuasive'. The validity of this rule was also recognised in Baleshwar Bagarti v. Bhagirathi Dass [1908] ILR 35 Cal 701, 713, where Mookerjee, J., stated the rule in these terms :
'It is a well-settled principle of interpretation that courts in construing a statute will give much weight to the interpretation put upon it, at the time of its enactment and since, by those whose duty it has been to construe, execute and apply it.' and this statement of the rule was quoted with approval by this Court in Deshbandhu Gupta & Co. v. Delhi Stock Exchange Associa-tion Ltd. .
But, the construction which is commending itself to us does not rest merely on the principle of contemporanea expositio. The two circulars of the CBDT to which we have just referred are legally binding on the revenue and this binding character attaches to the two circulars even if they be found not in accordance with the correct interpretation of Sub-section (2) and they depart of deviate from such construction. It is now well-settled as a result of two decisions of this Court, one in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 and the other in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 that circulars issued by the CBDT under Section 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act........."
36.2 In Rathi Alloys & Steel Ltd. v. Collector, Central Excise, Jaipur (1990) 1 JT SC 353, the Supreme Court held :
"...........But what cannot be overlooked is the innate injustice and hardship to which appellants have been exposed, primarily, due to action of department and Government. If the order of the Tribunal is upheld then it may result in harsh economic difficulty of some as appellants are secondary or small manufacturers who because of Board's clarification cleared the goods as steel ingots without any objection from the department. It may also lead to re-opening of matters which were closed long back. What is further significant is that dispute does not survive after 1983."
36.3. In Ranadey Micronutrients v. Collector of Central Excise (1996) 87 ELT 19 observed thus :
"One should have thought that an officer of the Ministry of Finance would have greater respect for circulars such as these issued by the Board, which also operates under the aegis of the Ministry of Finance, for it is the Board which is by statute, entrusted with the task of classifying excisable goods uniformly. The whole objective of such circulars is to adopt a uniform practice and to inform the trade as to how a particular product will be treated for the purposes of excise duty. It does not lie in the mouth of the Revenue to repudiate a circular issued by the Board on the basis that it is inconsistent with a statutory provision. Consistency and discipline are of far greater importance than the winning or losing of court proceedings."
36.4. In Collector of Central Excise, Patna v. Usha Martin Industries , the Supreme Court held :
"19. No doubt the court has to interpret statutory provisions and notifications thereunder as they are with emphasis to the intention of the Legislature. But when the Board made all others to understand a notification in a particular manner and when the latter have acted accordingly, is it open to the Revenue to turn against such persons on a premise contrary to such instructions ?
20. Section 37B of the Act enjoins on the Board a duty to issue such instructions and directions to the excise officers as the Board considers necessary or expedient 'for the purpose of uniformity in the classification of excisable goods or with respect to levy of duty excised on such goods'. It is true that Section 37B was inserted in the Act only in December, 1985 but that fact cannot whittle down the binding effect of the circulars or instructions issued by the Board earlier. Such instructions were not issued earlier for fancy or as rituals. Even the pre-amendment circulars were issued for the same purpose of achieving uniformity in imposing excise duty on excisable goods. So the circular, whether issued before December, 1985 or thereafter should have the same binding effect on the department.
21. Through a catena of decisions this Court has pronounced that Revenue cannot be permitted to take a stand contrary to the instructions issued by the Board. It is a different matter that an assessee can contest the validity or legality of a departmental instruction. But that right cannot be conceded to the department, more so when others have acted according to such instructions......"
36.5. In Paper Products Ltd, v. Commissioner of Central Excise (1999) 112 ELT 765 the Supreme Court held :
"It is clear from the abovesaid pronouncements of this Court that, apart from the fact that the circulars issued by the Board are binding on the department, the department is precluded from challenging the correctness of the said circulars even on the ground of the same being inconsistent with the statutory provision. The ratio of the judgment of this Court further precludes the right of the department to file an appeal against the correctness of the binding nature of the circulars. Therefore, it is clear that so far as the department is concerned, whatever action it has to take, the same will have to be consistent with the circular which is in force at the relevant point of time."
36.6. In Commissioner of Sales Tax, U.P. v. Indra Industries [2001] 122 STC 100, a three-Judge Bench of the Supreme Court categorically stated :
"A circular by tax authorities is not binding on the courts. It is not binding on the assessee. However, the interpretation that is thereby placed by the taxing authority on the law is binding on that taxing authority. In other words, the taxing authority cannot be heard to advance an argument that is contrary to that interpretation." (Emphasis* supplied).
The Supreme Court negatived the contention of the Sales Tax Department based on the decision in Bengal Iron Corporation v. Commercial Tax Officer [1993] 90 STC 47 that notwithstanding a circular to the contrary, it is entitled to recover tax from an assessee. The Supreme Court held that the decision in Bengal Iron Corporation [1993] 90 STC 47 (SC) can, at best apply only when a case of estoppel against a statute is made out,
37. We may next refer to some decisions of High Courts.
37.1. A division Bench of the Bombay High Court in Unit Trust of India v. P.K. Unny [2001] 249 ITR 612, while dealing with a circular issued by the CBDT under the Income-tax Act, held that benevolent circulars are binding on the department, even if they are based on deviations. It was further held that interpretations given by the Central Board of Direct Taxes (CBDT) in favour of the assessee are binding on the department and the department is estopped from raising any argument contrary to the interpretation placed by the CBDT.
37.2. A division Bench of this Court in Subhash Marketing v. Commissioner of Commercial Taxes in Karnataka [2000] 118 STC 136 held that where the circular issued by the Commissioner is in favour of the assessee, then those instructions will have to be followed in terms of Section 3-A(l).
38. The legal position as explained in all these decisions with reference to the circulars is that when a circular is issued under Section 119 of the Income-tax Act, 1961 or under Section 3-A of the Karnataka Sales Tax Act, 1957 containing an interpretation or clarification favouring the assessee, the circular is binding on the department, in particular, the assessing authorities. The assessing authority cannot ignore the circular or refuse to follow the circular on the ground that circular is not in accordance with the provisions of the Act. The provisions of the Act, as interpreted or clarified in the circular should be the basis for the assessing authority to complete the assessment. The circulars issued by the Commissioner are binding only on the assessing authority, but not on the appellate authority or the courts. As the assessing authority is required to follow the circular and if he followed the circular, the department cannot challenge the order of the assessing authority on the ground that order of the assessing authority is contrary to law. If the department at any point of time, feels that circular is not valid or contrary to the provisions of law, the Commissioner will have to set right the matter by issuing a fresh circular setting out the correct position of law. Such subsequent circular when issued, will have a prospective and not a retrospective effect.
39. Learned counsel for the Revenue referred to some decisions which have held that certain circulars are contrary to law and are not binding. But those decisions do not laid down a proposition that the assessing authority can ignore the circulars issued by the CBDT or Commissioner of Commercial Taxes. The fact that the High Court or the Supreme Court may ultimately pronounce upon the validity of the circular by either approving it or holding it to be illegal, does not mean that the assessing authority can do so, when he makes the assessment. The position would however be different, if the Supreme Court or High Court had already pronounced a circular to be bad, before the assessment is made. Therefore all circulars, even those that are ultimately found to contain wrong interpretation of the provisions of law or at variance with the provisions of law but which are in favour of the assessees, continue to be binding on the department until the circular is superseded or cancelled by a subsequent circular or held to be illegal and erroneous by the Supreme Court or concerned High Court.
40. It is also well-settled that any circular which beneficially affects the rights of assessees, as it stood at the beginning of the assessment year will apply to the entire year and the modification/ withdrawal of such circular will not be relevant for that current year but will only apply from the beginning of the next assessment year-vide decision of the Full Bench of the Kerala High Court in Commissioner of Income-tax, Kerala-I v. B.M. Edward, India Sea Foods the decision of the division Bench of the Kerala High Court in Commissioner of Income-tax, Kerala-II v. Geeva Films [1983] 141 ITR 632 confirmed by the Supreme Court by order dated November 17, 1982 in SLP (Civil) No. 1909 of 1980, the decision of the Andhra Pradesh High Court in Commissioner of Income-tax v. N.T. Ramarao , and the decision of the Madras High Court in Commissioner of Income-tax v. Prasad Productions P. Ltd. . The Bombay High Court in Shakti Raj Films Distributors v. Commissioner of Income-tax [1995] 213 ITR 20, stated the legal position in regard to circulars (other than those which only affect administrative or procedural matters) thus :
"(1) Certain circulars of the Board confer some privileges and rights on the assessees in regard to assessment.
(2) Such circulars as they stand on the first day of April of the assessment year must apply to the assessment of that year.
(3) Modification or withdrawal of such circulars during the pendency of the assessment proceedings, cannot prejudicially affect the right of the assessee to have his assessment made in accordance with the circular as it stood prior to its amendment or withdrawal."
In this case, there was no circular containing any clarification regarding Section 5-C earlier as the section itself was reinserted by Act No. 5 of 1996. In view of the legal position enunciated by the decisions referred to above, the circular dated April 12, 1996 will apply in regard to the assessment periods April 1, 1996 to March 31, 1997, April 1, 1997 to March 31, 1998, April 1, 1998 to March 31, 1999 and April 1, 1999 to March 31, 2000.
41. The petitioners next contended that circular dated April 12, 1996 should be made applicable even in regard to assessments between the period April 1, 1986 to March 31, 1996, as the clarifications contained in the circular dated April 12, 1996 applied to all pending assessments.
42. There is no merit in this contention. Section 5-C in its present form was originally introduced with effect from April 1, 1986 and continued in the statute book until March 31, 1992. By amendment Act No. 4 of 1992 the words "total turnover" were substituted for the words "taxable turnover". When the amended section was declared to be invalid by this Court in Shetty Leasing [1996] 100 STC 533, Section 5-C in its original form was reintroduced by Act No. 5 of 1996 with retrospective effect from April 1, 1986. Prior to April 12, 1996, there was no circular explaining the provisions of Section 5-C. When the circular itself was issued on April 12, 1996, it is not possible to say that the assessees regulated their business or affairs with reference to the terms of the circular dated April 12, 1996, prior to that date. When the provisions of Section 5-C are clear and when there was no circular specifying a different interpretation, it is not permissible for the assessees to contend that even in regard to the period prior to April 1, 1986, Section 5-C should be interpreted with reference to the circular dated April 12, 1996.
43. In view of the above, these petitions are allowed in part as follows :
(a) The validity of Section 5-C of Karnataka Sales Tax Act, 1957 is upheld. Section 5-C does not however apply to deemed sales (leasing transactions) : (i) outside the State ; (ii) in the course of import or export ; and (iii) inter-State.
(b) It is declared that the Commissioner's circular No. 31/1999-
2000 dated October 23, 1999 correctly interprets Section 5-C of KST Act (as it stood prior to April 1, 2000) and that the interpretation of Section 5-C in the earlier circular No. 5/1996-97 dated April 12, 1996 is erroneous.
(c) The instructions in the Commissioner's circular dated April 12, 1996 will, however, be binding on the assessing authorities in regard to the assessment periods April 1, 1996 to March 31, 1997, April 1, 1997 to March 31, 1998, April 1, 1998 to March 31, 1999 and April 1, 1999 to March 31, 2000.
(d) As a consequence, the respondents shall do or redo the assessments as detailed below :
(i) In regard to period April 1, 1986 to March 31, 1996, if any assessments, reassessments, revisions, rectifications are pending and are not barred by limitation, they will have to be concluded with reference to the Section 5-C as rightly interpreted in the circular dated October 23, 1999.
(ii) All assessments relating to the period April 1, 1996 to March 31, 2000, even pending, will be governed by the circular dated April 12, 1996.
(iii) As for as the assessment year April 1, 2000 to March 31, 2001 onwards, the circular dated October 23, 1999 will not apply in view of the insertion of the following proviso to Section 5-C with effect from April 1, 2000 : "Provided that no tax shall be levied under this section if the goods in respect of which the right to use is transferred, have been subjected to tax under Section 5".
(e) The question whether a particular transaction amounts to transfer of right to use goods is left open to be decided by the authorities with reference to the facts and circumstances of the respective cases and this decision is restricted only to declaring the correct interpretation of Section 5-C and the effect of the two circulars dated April 12, 1996 and October 23, 1999.
(f) As the correctness of the orders of assessment/reassessment or revisional orders, is not examined in this order, it is open to such of the petitioners who are aggrieved by any order to file appeals before the appropriate authority as per law, and if such appeals are filed within 30 days from the date of receipt of this order, they shall not be rejected on the ground of limitation.
(g) In cases where notices are challenged, petitioners are given four weeks time from the date of receipt of this order to file objections. The concerned authority shall consider the same and pass appropriate orders in the light of this judgment.
(h) The circular dated October 23, 1999 will not however enable the assessing authority to reopen the assessments which have attained finality in accordance with law.
(i) Parties to bear their respective costs.