Andhra HC (Pre-Telangana)
Rashtriya Ispat Nigam Ltd. vs Commercial Tax Officer, Company ... on 15 December, 1989
Equivalent citations: [1990]77STC182(AP)
Author: Syed Shah Mohammad Quadri
Bench: B.P. Jeevan Reddy, S.S. Mohammed Quadri
JUDGMENT Syed Shah Mohammad Quadri, J.
1. The question which falls for consideration in this writ petition, is the scope of exigibility of sales tax under section 5-E of the Andhra Pradesh General Sales Tax Act, 1957 (for short "the Act"), on the hire charges collected by a person on supply of machinery for execution of his work to any contractor.
2. The sales tax before the Forty-sixth Amendment of the Constitution was a tax on sales or purchase of goods. But the tax base has undergone a sea-change due to insertion of clause (29A) in article 366 by the Constitution (Forty-sixth Amendment) Act, 1982. We may notice here clause (29A) of article 366 :
"(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."
3. Thereafter, the Sales Tax Acts of the States including the Andhra Pradesh General Sales Tax Act were amended. Act. No. 18 of 1985 brought about many changes including insertion of section 5-E in the Act. Section 5-E of the Act reads as follows :
"5-E. Tax on the amount realised in respect of any right to use goods. - Every dealer who transfers the right to use any goods for any purpose, whatsoever, whether or not for a specified period, to any lessee or licensee for cash, deferred payment or other valuable consideration, in the course of his business shall, on the total amount realised or realisable by him by way of payment in cash or otherwise on such transfer or tansfers of the right to use such goods from the lessee or licensee, pay a tax at the rate of five paise in every rupee of the aggregate of such amount realised or realisable by him during the year :
Provided that no such tax shall be levied if the turnover of the dealer including such aggregate is less than Rs. 1,00,000."
4. A perusal of these provisions shows that the scope of tax on sale or purchase is considerably enlarged and that sub-clause (d) of clause (29A) of article 366 of the Constitution is now the basis of exigibility of tax under section 5-E of the Act.
5. An owner of property has a bundle of rights in it, namely, right to possess, right to use and enjoy, right to usufruct, right to consume, to destroy, to alienate or transfer, etc. In law it is not only possible but also permissible that the various rights and interest may be vested in various persons. While remaining the owner of a property, a person may create a charge on the property, mortgage it or lease it. In the transaction of sale, all the rights of the owner are transferred to the purchaser and it is said that the property in the goods passes to the purchaser. In a lease of immovable property, there is a transfer of a right to enjoy such property; "a lease of land and a bailment of chattels are transactions of essentially the same nature." (Salmond on Jurisprudence - Twelfth Edition at page 424) Section 148 of the Contract Act defines "bailment" in the following terms :
"148. 'Bailment', 'bailor' and 'bailee' defined. - A 'bailment' is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the 'bailor'. The person to whom they are delivered is called the 'bailee'."
6. Thus in bailment there is transfer of goods for a particular period and thereafter the goods have to be returned to the person delivering them. One of the categories of bailment is hire of chattel. In Halsbury's Laws of England (Fourth Edition) at paragraph 1551 it is defined as follows :
"It is a contract by which the hirer obtains to use the chattel hired in return for the payment to the owner of the price of the hiring."
7. It is this category of bailment of goods that is the tax base under section 5-E of the Act. The taxable event under section 5-E is the transfer of the right to use any goods. What does this phrase connote ? This means that unless there is a transfer of the right to use the goods, no occasion for levying tax arises; providing a facility which involves the use of goods nor even a right to use the goods is not enough, there must be a transfer of that right.
"The transfer of a right is an event which has a double aspect. It is the acquisition of a right by the transferee, and loss of it by the transferor. The vestitive fact, if considered with reference to the transferee is a derivative title, while from the point of view of the transferor it is an alienative fact."
(Salmond on Jurisprudence - Twelfth Edition at pages 332 and 333.)
8. In Corpus Juris Secundum "transfer" is defined :
"The common use of the word 'transfer' is to denote the passing of title in property, or an interest therein, from one person to another, and in this sense the term means that the owner of property delivers is to another person with the intent of passing the rights which he had it to the latter."
(Corpus Juris Secundum, Vol. 87, page 892.)
9. The essence of transfer is passage of control over the economic benefits of property which results in terminating rights and other relations in one entity and creating them in another. While construing the word "transfer" due regard must be had to the thing to be transferred. A transfer of the right to use the goods necessarily involves delivery of possession by the transferor to the transferee. Delivery of possession of a thing must be distinguished from its custody. It is not uncommon to find the transferee of goods in possession while transferor is having custody. When a taxi cab is hired under "rent-a-car" scheme, and a cab is provided, usually driver accompanies the cab; there the driver will have the custody of the car though the hirer will have the possession and effective control of the cab. This may be contrasted with the case when a taxi car is hired for going from one place to another. There the driver will have both the custody as well as possession; what is provided is service on hire. In the former case, there was effective control of the hirer (transferee) on the cab whereas in the latter case it is lacking. We may have many examples to indicate this difference.
10. Whether there is a transfer of the right to use or not is a question of fact which has to be determined in each case having regard to the terms of the contract under which there is said to be a transfer of the right to use.
11. In the instant case, the petitioner - Rashtriya Ispat Nigam Limited owing Visakhapatnam Steel Project, for the purpose of the steel project allotted different works of the project to contractors. To facilitate the execution of work by the contractors with the use of sophisticated machinery, the petitioner has undertaken to supply the machinery to the contractors for the purpose of bring used in the execution of the contracted works of the petitioner and received charges for the same. The respondents made provisional assessment levying tax on the hire charges under section 5-E of the Act. In this writ petition, the petitioner prays for a declaration that the tax levied by the 1st respondent in purported exercise of power under section 5-E of the Act on the hire charges collected during the period 1988-89, is illegal and unconstitutional.
12. The respondents filed a counter-affidavit in support of the levy stating that the validity of A.P. Amendment Act (18 of 1985) which introduced section 5-E of the Act was upheld by the High Court of Andhra Pradesh in Padmaja Commercial Corporation v. Commercial Tax Officer [1987] 66 STC 26; (1987) 4 APSTJ 26. It is further stated that the provisional assessment under section 15 of the Act has been made every month on account of submission of incorrect monthly returns claiming wrong exemption. The petitioner, it is stated, is lending highly sophisticated and valuable imported machinery to the contractors engaged by the petitioner for the purpose of construction of steel project. The machinery like cranes, docers, dumfors, road rollers, compressors, etc., are lent by the petitioner to the contractors for the use in the execution of project wok for which hire charges at specified rate are being collected by it. The machinery is given in the possession of the contractor and he is responsible for any loss or damage to it. The contractor has got every right to use it in his work at his discrection. It is further stated that in view of these clear terms and conditions there is transfer of property in goods for use, for a specific purpose and for a specified period for money consideration. The amounts charges by the petitioner attracts tax liability under section 5-E of the A.P. General Sales Tax Act, 1957.
13. Sri P. Venkatarama Reddy, the learned counsel for the petitioner, submits that under the terms and conditions of the contract, the contractor is provided with the facility of using the machinery if the same is available with the petitioner and there is no transfer of the right to use the machinery and for this purpose he relies on clauses 1, 5, 7, 13, and 14 of the contract to show that there is no transfer; while the learned Government Pleader submits that clauses 10 and 12 clearly show that there is a transfer of right and, therefore, tax is validity levied.
14. In our view, whether the transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as a whole, to determine the nature of the transaction. From a close reading of all the clauses in the agreement, it appears to us that the contractor in entitled to make use of the machinery for purposes of execution of the work of the petitioner and there is no transfer of right to use as such in favour of the contractor. We have reached this conclusion because the effective control of the machinery even while the machinery is in the use of the contractor is that of the petitioner-company. The contractor is not free to make use of the same for other works or move it out during the period the machinery is in his use. The condition that he will be responsible for the custody of the machinery while the machinery is on the site does not militate against the petitioners' possession and control of the machinery. For these reasons, we are of the opinion that the transaction does not involve transfer of the right to use the machinery in favour of the contractor. As the fundamental requirement of section 5-E is absent, the hire charges collected by the petitioner from the contractor are not exigible to sales tax.
15. Now we shall refer to the cases cited by the learned counsel for the parties.
16. In Anamalai Timber Trust Ltd. v. Trippunithura Devaswom AIR 1954 TC 305, the elephants along with mahout were given on contract of lease for a period of one year. During the execution of the contract, an elephant died. It was an admitted case that the elephant died due to rash and negligent act of the mahout. The government which lent the elephant and mahout to the defendant, claimed the value of the dead elephant in the suit. The question was whether the mahout was the employee of the Government who lent the elephant along with mahout or that of the defendant to whom the mahout and the elephant were lent. A Division Bench of the Travancore-Cochin High Court held that the transaction constituted bailment; in so far as the elephant was concerned, the relationship between the plaintiff and defendant was that of the bailor and the bailee, and in so far as the mahout was concerned it was observed that when one person lent his servant to another for a particular employment, the servant, for anything done in the course of that particular employment, must be dealt with as the servant of the man to whom he is lent though he remained the general servant of the person who lent him.
17. In State Bank of India v. State of Andhra Pradesh , the charges collected by the banks on hiring of lockers to the constituents were sought to be taxed under section 5-E of the Act. It was held by this Court, Inter alia, that the transaction does not involve transfer of the right to use the goods. The court also found that the lockers did not constitute goods and there was also no transfer of the right to use the goods. It further held that the hire charges received from the constituents for the use of the lockers formed a fraction and inseparable part of the composite charge for a variety of services and not merely for the use of the locker.
18. In 20th Century Finance Corporation Limited v. State of Maharashtra [1989] 75 STC 217 (Bom) the constitutional validity of section 3 of the Maharashtra Sales Tax on the Transfer of the Right to use any Goods for any purpose Act, 1985, was challenged. The court has held that in cases of tax imposed on transaction which is sale according to section 4 of the Sale of Goods Act, it is the transfer of property in goods which attracts sales tax. In the case of transfer of the right to use goods it is delivery of possession to be lessee for its use which is made taxable. The court found that the impugned Act was not in contravention of article 269 of the Constitution and was therefore, not ultra vires the legislative competence of the State Legislature.
19. The petitioner field an additional affidavit enclosing orders of the Appellate Deputy Commissioner, Kakinada, on 15th November, 1989, in regard to assessment years 1986-87, holding that under the terms and conditions of the agreement, there is no transfer of the right to use the machinery in favour of the contractor. We can only observe that these orders have our approval in view of the conclusion reached by us.
20. For all these reasons we hold that providing machinery of whatever description to the contractor by the petitioner in connection with the execution of its work does not amount to transfer of the right to use the machinery, so imposition of sales tax on the hire charges of the machinery under section 5-E of the Act is ultra vires the section and is, therefore, illegal. The writ petition is accordingly allowed but, having regard to the circumstances of the case, we direct the parties to bear their own costs.
21. Writ petition allowed.