Karnataka High Court
India Equipment Leasing Ltd. vs Deputy Commissioner Of Commercial ... on 29 June, 1998
Equivalent citations: [1998]111STC403(KAR)
ORDER V.K. Singhal, J.
1. The validity of Section 5C read with Explanation (3)(d) of Section 2(1)(t) of the Karnataka Sales Tax Act, 1957 have been assailed and since the controversy is common in all these petitions they are disposed of by this common order.
2. In consequence of the 46th Constitutional amendment Section 5C of the Act, was inserted by Act No. 27 of 1985 providing for levying and collection of tax on leasing transactions involving transfer of right to use the goods. In the case of Shetty Leasing (India) Ltd. v. Union of India [1996] 100 STC 533 (Kar), the provisions were struck down and thereafter by Karnataka Act 5 of 1996 the present provisions were inserted retrospectively with effect from April 1, 1986. The provisions are as under :
"5C. Levy of tax on the transfer of the right to use any goods.--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."
Section 2(t) of the Act deals with definition of "sale". By Act 27 of 1985 the scope of definition of "sale" was extended by including besides other transfer of property includes, a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, or for deferred payment or other valuable consideration. The third explanation to the definition of "sale" is as under :
"Explanation (3).--(a) The sale or purchase of goods other than in the course of inter-State trade or commerce or in the course of import or export shall be deemed for the purposes of this Act, to have taken place in the State wherever the contract of sale or purchase might have been made, if the goods are within the State,--
..........
(d) Notwithstanding anything contained in the Sale of Goods Act, 1930 (Central Act 3 of 1930), for the purpose of this Act, the transfer of the right to use any goods for any purpose (whether or not for a specified period), shall be deemed to have taken place in the State, if such goods are for use within the State, irrespective of the place where the contract of transfer of the right to use the goods is made."
3. Clause (d) of Explanation (3) besides the provision of Section 5C of the Karnataka Sales Tax Act have been assailed on the ground that in respect of transactions which are falling under Section 3 of the Central Sales Tax Act, 1956 the tax have to be levied only on the basis of the fact that goods are within the State and have been put to use ignoring the nature of the transaction.
4. Constitution 46th Amendment Act of 1982 inserted Clause (29A) in Article 466 providing definition of "sale" in view of the series of decisions of the apex Court on the jurisdiction of the State Legislature to levy tax on the sale or purchase of goods. Article 466(29A) reads as under :
"(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) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract ;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments ;
(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) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration ;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, 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."
5. In the statement of objects and reasons it was mentioned that "Device by way of lease of films has also been resulting in avoidance of sales tax. The main right in regard to a film relates to its exploitation and after exploitation for a certain period of time, in most cases, the film ceases to have any value. It is, therefore, seen that instead of resorting to the outright sale of a film, only a lease or transfer of the right to exploitation is made."
6. Article 269 of the Constitution of India deals with taxes levied and collected by the Union but assigned to the States and Clause (g) "taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce" is one of the items. Under Clause (3) of Article 269, the Parliament is empowered to formulate principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce. Article 246 of the Constitution confers exclusive power to make laws with respect to any matter enumerated in List I in the Seventh Schedule. Entry 92-A is in respect of tax on the sale or purchase of goods other than newspapers where such sale or purchase takes place in the course of inter-State trade or commerce. Central Sales Tax Act, 1956 have been enacted under the said powers. Chapter II of the said Act deals with formulation of principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce or outside a State or in the course of import or export into or outside India. Sections 14 and 15 of the said Act refers to goods of special importance in inter-State trade or commerce and the restrictions and conditions in the matter of imposing sales tax on the said goods.
7. Article 286 of the Constitution of India places restriction on imposition of tax on sale or purchase of goods which is as under :
"286. Restrictions as to imposition of tax on the sale or purchase of goods.--(1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place--
(a) outside the State ; or
(b) in the course of the import of the goods into, or export of the goods out of, the territory of India.
(2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in Clause (1).
(3) Any law of a State shall, in so far as it imposes, or authorises the imposition of,--
(a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce ; or
(b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of Clause (29A) of Article 466, 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."
8. Section 2(g) of the Central Sales Tax Act, 1956 defines "sale" as under :
"'sale' with its grammatical variations and cognate expressions, means any transfer of property in goods by one person to another for cash or for deferred payment or for any other valuable consideration, and includes a transfer of goods on the hire-purchase or other system of payment by instalments, but does not include a mortgage or hypothecation of or a charge or pledge on goods."
After the amendment of the Constitution by 46th Constitutional Amendment Act of 1982 inserting Clause (29A) to Article 466 extending the scope of sale, there was no consequential amendment in the Central Sales Tax Act. The definition of "sale" under the local Act have been brought in consonance with the Constitutional amendment. Before the amendment of the Constitution, transfer of right to use goods was not within the purview of the State Legislature to levy tax and it is by virtue of Article 466(29A) the transfer of right to use is deemed to be a sale. Though in the Central Sales Tax Act, the definition of "sale" refer to transactions of hire-purchase, but not of these transactions. It was on the basis of the report of the Law Commission suggesting wider scope of transactions resembling sale "within the ambit of entry 54 of List II the amendment in the Constitution was made.
8A. In State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. , it was held as under :
"In order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title to goods, which presupposes capacity to contract, that it must be supported by money consideration, and that as a result of the transaction property must actually pass in the goods. Unless all these elements are present, there can be no sale. Thus, if merely title to the goods passes but not as a result of any contract between the parties, express or implied, there is no sale. So also if the consideration for the transfer is not money but other valuable consideration, it may then be exchange or barter but not a sale. And if under the contract of sale, title to the goods has not passed, then there is an agreement to sell and not a completed sale. Moreover under the law there cannot be an agreement relating to one kind of property and a sale as regards another. There must be an agreement between the parties for the sale of the very goods in which eventually property passes."
8B. Section 2(7) of the Sale of Goods Act, defines "goods" as under :
" 'goods' means every kind of movable property other than actionable claims and money ; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale."
Chapter V of the Transfer of Property Act deals with lease of immovable property.
9. In the context of works contract the enlarged definition of "sale" by constitutional amendment by including transfer of property in goods involved in works contract was assailed in Builders Association of India v. Union of India . In that case it was held that the Sales Tax Laws passed by the Legislature of the State levying tax on the transfer of property in goods, whether as goods or in some other form, involved in the execution of works contract are subject to the restrictions and conditions mentioned in each clause or sub-clause of Article 286 of the Constitution and the constitutional amendment was upheld.
10. Explanation (3) to Section 2(1)(t) of the Karnataka Sales Tax Act was assailed in Builders Association of India v. State of Karnataka and the writ petitions were dismissed.
11. This judgment was assailed before the apex Court and the appeals were dismissed in [1993] 88 STC 248 (Builders Association of India v. State of Karnataka). It was however, observed that definition fixing situs of sale has to be read subject to the provisions excluding sale in the course of inter-State trade or commerce or export sales. It was observed as under (at page 254) :
"A perusal of Clause (t) shows that in the main part the expression 'sale' has been defined and in the inclusive part of the said definition, sub-clauses (i) to (iv) reproduce sub-clauses (a) to (d) of Clause (29-A) of Article 466. Explanation (3) contains three clauses, whereby the situs of the sale is fixed. Clause (a) of Explanation (3) contains the words 'other than the sale in the course of inter-State trade or commerce or in the course of import or export' which means that a sale or purchase of goods in the course of inter-State trade or commerce or in the course of import or export is excluded. Moreover Clause (a) of Explanation (3) merely reproduces the provisions contained in the main part of Sub-section (2) of Section 4 of the Central Sales Tax Act. Clause (b) of Explanation (3) contains the explanation in Sub-section (2) of Section 4, of the Central Sales Tax Act. Clause (c) of Explanation (3) relates to works contracts and fixes the situs of the deemed sales resulting from transfer of property in goods involved in execution of a works contract. It starts with a non obstante clause which refers to the Sale of Goods Act, 1930. This means that Clause (c) has to be read with other provisions of the Act, including clauses (a) and (b) of explanation (3), which expressly exclude a sale in the course of inter-State trade or commerce and a sale in the course of import or export. Construing Clause (c) in the light of clauses (a) and (b) of Explanation (3) we are unable to hold that in fixing the situs in respect of deemed sales resulting from transfer of property in goods involved in execution of a works contract the Legislature has included a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import or export."
In Gannon Dunkerley & Co. v. State of Rajasthan competence of State Legislature to levy tax on contract was again challenged and the deemed sales were considered excluding sales in the course of inter-State trade or commerce and those outside the State or in the course of import or export. It was observed thus (at page 224) :
"The legislative power of the States under entry 54 of the State List is subject to two limitations--one flowing from the entry itself which makes the said power 'subject to the provisions of entry 92-A of List I' and the other flowing from the prohibition contained in Article 286. Under entry 92-A of List I Parliament has the power to make a law in respect of taxes on sale or purchase of goods other than newspapers where such sale or purchase takes place in the course of inter-State trade or commerce. The levy and collection of such tax is governed by Article 269. This shows that the legislative power under entry 54 of the State List is not available in respect of transactions of sale or purchase which take place in the course of inter-State trade or commerce. Similarly Clause (1) of Article 286 prohibits the State from making a law imposing or authorising the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place (a) outside the State or (b) in the course of the import of goods into or export of the goods out of the territory of India. As a result of the said provision, the legislative power conferred under entry 54 of the State List does not extend to imposing tax on a sale or purchase of goods which takes place outside the State or which takes place in the course of import or export of goods. In view of the aforesaid limitations imposed by the Constitution on the legislative power of the States under entry 54 of the State List, it is beyond the competence of the State Legislature to make a law imposing or authorising the imposition of a tax on transfer of property in goods involved in the execution of a works contract, with the aid of sub-clause (b) of Clause (29A) of Article 466, in respect of transactions which take place in the course of inter-State trade or commerce or transactions which constitute sales outside the State or sales in the course of import or export. Consequently, it is not permissible for a State to frame the legislative enactment in exercise of the legislative power conferred by entry 54 in State List in a manner as to assume the power to impose tax on such transactions and thereby transgress these constitutional limitations. Apart from the limitations referred to above which curtail the ambit of the legislative competence of the State Legislatures, there is Clause (3) of Article 286 which enables the Parliament to make a law placing restrictions and conditions on the exercise of the legislative power of the State under entry 54 in State List in regard to the system of levy, rates and other incidents of tax. Such a law may be in relation to (a) goods declared by the Parliament by law to be of special importance in inter-State trade or commerce, or (b) to taxes of the nature referred to in sub-clauses (b), (c) and (d) of Clause (29A) of Article 466. When such a law is enacted by the Parliament the legislative power of the States under entry 54 in the State List has to be exercised subject to the restrictions and conditions specified in that law. In exercise of the power conferred by Article 286(3)(a) the Parliament has enacted Sections 14 and 15 of the Central Sales Tax Act, 1956. Now law has, however, been made by the Parliament in exercise of its power under Article 286(3)(b)."
12. Regarding the situs of sale it was observed thus (page 231) :
"The location of the situs of the sale in sales tax legislation of the State would, therefore, have no bearing on the chargeability of tax on sales in the course of inter-State trade or commerce since they fall outside the field of legislative competence of the State Legislatures and will have to be excluded while assessing the tax liability under the State legislation. The same is true of sales which are outside the State and sales in the course of import and export. The State Legislature cannot so frame its law as to convert an outside sale or a sale in the course of import and export into a sale inside the State, The question whether a sale is an outside sale or a sale inside the State or whether it is a sale in the course of import or export will have to be determined in accordance with the principles contained in Sections 4 and 5 of the Central Sales Tax Act and the State Legislature while enacting the sales tax legislation for the State cannot make a departure from those principles."
Eight conclusions were arrived at after discussing the law at length. For the present controversy the first four conclusions which are relevant are as under :
"(1) In exercise of its legislative power to impose tax on sale or purchase of goods under entry 54 of the State List read with Article 466(29A)(b), the State Legislature, while imposing a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract is not competent to impose a tax on such a transfer (deemed sale) which constitutes a sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import or export.
(2) The provisions of Sections 3, 4, 5 and Sections 14 and 15 of the Central Sales Tax Act, 1956, are applicable to a transfer of property in goods involved in the execution of a works contract covered by Article 466(29A)(b).
(3) While defining the expression 'sale' in the sales tax legislation it is open to the State Legislature to fix the situs of a deemed sale resulting from a transfer falling within the ambit of Article 466(29A)(b) but it is not permissible for the State Legislature to define the expression 'sale' in a way as to bring within the ambit of the taxing power a sale in the course of inter-State trade or commerce, or a sale outside the State, or a sale in the course of import and export.
(4) The tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract falling within the ambit of Article 466(29A)(b) is leviable on the goods involved in the execution of a works contract and the value of the goods which are involved in the execution of works contract would constitute the measure for imposition of the tax."
13. In the case of Gannon Dunkerley & Co. , the observations in Builders' Association of India v. Union of India were taken into consideration, which I need not go into in more detail as the question of exclusion of inter-State sale or export are not seriously disputed. If the transaction is an inter-State sale or a sale in the course of export, then the State Legislature has no jurisdiction to legislate on that point. Explanation (3) to the definition of "sale" under the Karnataka Sales Tax Act, 1957 itself excludes the sale or purchase of goods which are in the course of inter-State trade or commerce or in the course of export or import. When there is such an exclusion in Clause (a) to Explanation (3) to Section 2(t), then Clause (d) of the said Explanation has to be read as subject to that and as such Explanation (3)(d) to Section 2(t) or Section 5C of the Act is not to be declared as beyond the legislative competence.
14. The controversy regarding legislative competence of the State Legislature with reference to location of goods at the time of use was examined by the Bombay High Court in the case of 20th Century Finance Corporation Limited v. State of Maharashtra [1989] 75 STC 217 and the validity was upheld. The Andhra Pradesh High Court in the case of I.T.C. Classic Finance and Services v. Commissioner of Commercial Taxes [1995] 97 STC 330 again examined this matter, and relying on English Electric Company of India Ltd. v. Deputy Commercial Tax Officer , Balabhagas Hulaschand v. State of Orissa and Union of India v. K.G. Khosla and Co. Ltd. , observed that passing of property in States is not material and it is the inter-State movement which must be as a result of the covenant expressed or implied in the conduct of sale or an incidence of contract which make transaction as inter-State sale. The judgment of the Bombay High Court in 20th Century Finance Corporation Ltd, [1989] 75 STC 217, referred to above was dissented. The hiring itself was considered as incident of contract of sale which occasioned in the inter-State movement of goods.
15. Section 2(1)(u-1) of the Karnataka Sales Tax Act deals with taxable turnover on which a dealer is liable to pay tax which has to be determined after making such deductions from his total turnover and in such manner as may be prescribed. This section itself has excluded 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 5C of the Act is subject to the definition which has been given in Section 2(1)(u-1) of the Act as contemplated by Section 5(6) of the Karnataka Sales Tax Act.
16. In the case of Builders' Association of India [1993] 88 STC 248 (SC), the definition of "sale" was examined with reference to Clause (t). The definition of "sale" as in the Karnataka Sales Tax Act was examined and it was observed that Clause (a) of Explanation (3) contains the words "other than the sale in the course of inter-State trade or commerce or in the course of import or export" which means that the sale or purchase of goods in the course of inter-State trade or commerce or in the course of import or export is excluded. Though the said dispute in the matter was with regard to transfer of property in goods involved in the execution of a works contract, it was held that the State Legislature has excluded the sale in the course of inter-State trade or commerce or a sale outside the State or a sale in the course of import or export. It was also held that all transfers, delivery and supply of goods referred to in sub-clauses (a) to (f) of Clause (29A) of Article 466 of the Constitution are subject to the restrictions and conditions mentioned in clauses (1), (2) and sub-clause (a) of Clause (t) of Article 286 of the Constitution and the transfers and deliveries that take place under sub-clauses (b), (c) and (d) of Clause (29A) of Article 466 of the Constitution are subject to additional restrictions mentioned in sub-clause (b) of Article 286(3) of the Constitution. Even in the case of Gannon Dunkerley's case [1993] 88 STC 204, it was observed by the apex Court that while enacting law imposing a tax on sale or purchase of goods under entry 54 of the State List read with sub-clause (b) of Clause (29A) of Article 466 of the Constitution, it is not permissible for the State Legislature to make law imposing tax on such a deemed sale which constituted a sale in the course of inter-State trade or commerce under Section 3 of the Central Sales Tax Act or an outside sale as defined under Section 4 of the Central Sales Tax Act or sale in the course of import or export under Section 5 of the Central Sales Tax Act. So also, it is not permissible for the State Legislature to impose tax on goods declared to be of special importance in inter-State trade or commerce under Section 14 of the Central Sales Tax Act, except in accordance with the restrictions and conditions contained in Section 15 of the Central Sales Tax Act. On the point of situs of sale it was observed that :
"The location of the situs of the sale in sales tax legislation of the State would, therefore, have no bearing on the chargeability of tax on sales in the course of inter-State trade or commerce since they fall outside the field of legislative competence of the State Legislatures and will have to be excluded while assessing the tax liability under the State legislation. The same is true of sales which are outside the State and sales in the course of import and export. The State Legislature cannot so frame its law as to convert an outside sale or a sale in the course of import and export into a sale inside the State."
17. In Onkarlal Nandlal v. State of Rajasthan , it was observed thus :
"There is no antithesis between a sale in the course of inter-State trade or commerce and a sale inside the State. Even an inter-State sale must have a situs and the situs may be in one State or another. It does not involve any contradiction in saying that an inter-State sale or purchase is inside a State or outside it. A sale which is in the course of inter-State trade or commerce cannot be taxed by a State Legislature even if its situs is within the State, because the State Legislature has no legislative competence to impose tax on sale in the course of inter-State trade or commerce."
18. The various provisions of law and the judgments referred to above makes it abundantly clear that sufficient safeguards have been made by the State Legislature in Section 5C and Explanation (3) of Section 2(t) of the Karnataka Sales Tax Act by virtue of which the inter-State sales and export sales have been excluded. For the purpose of determining the transaction as to whether it an inter-State sale or sale in the course of export, the provisions of Sections 3 and 5 of the Central Sales Tax Act have been interpreted by the apex Court in series of judgments and therefore, if a transaction of sale falls within the purview of the principles laid down under Section 3 or 5 of the Central Sales Tax Act, no tax is levied by the State Legislature under Section 5C of the Act. It may also be observed that it is not only the movement of the goods from one State to another but the movement must be in pursuance of the contract of sale which will exclude transactions outside the purview of Section 5C of the Act. If the movement of goods from one State to another is an incident or covenant of contract of sale, then the State Legislature cannot levy the tax and it has made sufficient provisions to exclude such transactions in the case of leasing contracts where the rights to use is given it must be of goods and the goods as defined under Section 2(7) of the Sale of Goods Act which refers to only moveable property. In the case of Gannon Dunkerley & Co. v. State of Rajasthan it was held that if the goods are immovable, then the State Legislature was incompetent to levy tax on it. The 46th constitutional Amendment has only extended the definition of "sale" but has not brought within the purview of the State Legislature right of use of immovable property as they are not goods.
19. The transactions of right to use have not been considered as the sale under the Central Sales Tax Act, as the definition of "sale" in the Act has not been amended. A legal fiction is created by the Constitutional Amendment Act to deal with transfer of right to use the goods as sale. If this transfer of right to use of sale has resulted in the movement of goods from one State to another, then irrespective of the fact that such transactions are not covered within the definition of "sale" under the Central Sales Tax Act would be considered as deemed sale under the local Act and cannot be dissociated into two, namely, the movement of goods from one State to another and that deemed sale thereafter. There can be a separate agreement for movement of goods from one State to another and separate agreement for right to use those goods in a particular State. If there are separate contracts, then the position may be different. But, if the movement of goods from one State to another is part of the same contract by which right to use has been given in respect of those goods, then the principles embodied under Sections 3 and 5 of the Central Sales Tax Act would govern the transactions.
The provisions of Section 5C or Explanation (3)(d) of Section 2(1)(t) of the Act cannot be declared as ultra vires of the Constitution.
20. In view of the above, all these writ petitions are disposed of. The assessment orders which have been framed or issued are hereby quashed and the assessing authority is directed to examine the matter afresh and determine the nature of transactions and exclude those transactions which fall in the course of inter-State trade and commerce or in the course of import. In cases where only proposition notices have been issued to the petitioners, they are free to submit their detailed reply to the assessing authority who will examine the contentions in the light of the observations made above.