Allahabad High Court
M/S Triveni Engineering & Industries ... vs The Commissioner Of Trade Tax U.P., ... on 27 November, 2017
Author: Yashwant Varma
Bench: Yashwant Varma
HIGH COURT OF JUDICATURE AT ALLAHABAD AFR Court No. - 59 Case :- SALES/TRADE TAX REVISION No. - 918 of 2006 Applicant :- M/S Triveni Engineering & Industries Ltd. Thru' Dy. Manager Opposite Party :- The Commissioner Of Trade Tax U.P., Lucknow Counsel for Applicant :- Piyush Agrawal,Bharat Ji Agrawal Counsel for Opposite Party :- S.C. AND Case :- SALES/TRADE TAX REVISION No. - 919 of 2006 Applicant :- M/S Triveni Engineering & Industries Ltd. Thru' Dy. Manager Opposite Party :- The Commissioner Of Trade Tax U.P., Lucknow Counsel for Applicant :- Piyush Agrawal,Bharat Ji Agrawal Counsel for Opposite Party :- S.C. Hon'ble Yashwant Varma,J.
Heard Shri Piyush Agrawal, learned counsel for the revisionist and Shri A.C. Tripathi, learned standing counsel.
Both these revisions are with the consent of parties taken up for disposal together since they raise common questions of law. The two issues, which have been canvassed for consideration, relate to the taxability under Section 3-F of the U.P. Trade Tax 1948 on an agreement transferring a right to use certain machinery items. The second issue which arises is a levy of tax on the sale of molasses effected by the revisionist in the assessment year in question. The issue itself arises in the following backdrop of facts.
On 10 August 1993, the revisionist executed a lease agreement in favour of M/s. Gangeshwar Ltd with respect to machinery and equipment described in Schedule-'A' thereof. The lease agreement gave M/s. Gangeshwar Ltd a right to use machinery owned by the revisionist. The terms of this agreement are stated to have been extended during the assessment year in question. Both the corporate entities thereafter appear to have entered into an arrangement to merge. The revisionist was the Transferor Company while M/s. Gangeshwar Ltd was the Transferee Company. The Scheme of Arrangement was sanctioned by an order of the Court dated 6 March 2000. The "appointed date" under the scheme was stipulated to be 1 October 1997, while the "effective date" was to mean the date when a certified copy of the order passed by the High Court sanctioning the Scheme is filed with the Registrar of Companies. The relevant provisions of the Scheme read thus:
"2.5 With effect from the Appointed Date, all debts, liabilities, duties and obligations of the Transferor Company (hereinafter referred to as "the said liabilities"), subject to the changes due to carrying on of the business by the Transferor Company upto the Effective Date in accordance with clause 2.1, shall, pursuant to the Order under Section 394 of the Companies Act, 1956 and without any further act or deed, also be transferred or deemed to be transferred to and vested in and assumed by the Transferee Company so as to be the debts, liabilities, duties and obligations of the Transferee Company and the same shall be paid and discharged by the Transferee Company on the same terms and conditions as agreed to by the Transferor Company and the creditors respectively.
2.6 With effect from the Appointed Date and up to and including the Effective Date:
(a) The Transferor Company shall carry on and be deemed to have carried on all its businesses and activities and shall be deemed to have held and stand possessed of and shall hold and stand possessed of all the properties and assets referred to in Clause 2.4 hereinabove for and on account of and in trust for the benefit of the Transferee Company.
(b) All the profits and incomes accruing or arising to the Transferor Company or expenditure and losses incurred or suffered as the case may be by the Transferor Company shall, for all purposes, be treated and be deemed to accrue as the profits, incomes or expenditures or losses, as the case may be, for and on account of and in trust for the benefit of the Transferee Company.
(c) All taxes (including income-tax) paid or withheld in respect of or with reference to any profits or income from business and activities accruing to the Transferor Company shall be deemed to have been paid or withheld from the Transferor Company in its capacity as a trustee under Section 160 of the Income-tax Act,1961 for the benefit of the Transferee Company.
(d) On the Scheme becoming effective, the Transferee Company would be entitled to revise its income tax returns as also the income tax returns filed by the Transferor Company so far as is necessitated on account of the Scheme becoming effective with effect from 1st October, 1997, being the Appointed Date under the Scheme, and such returns may be revised by the Transferee Company within one year of the Scheme becoming effective.
2.7 All properties and assets owned, held or acquired and investments made by the Transferor Company on or after the Appointed Date shall, subject to the other provisions of the Scheme, for all purposes, be deemed to have been owned, held or acquired/made by the Transferor Company as a trustee for the benefit of the Transferee Company, and accordingly, shall, without any further act or deed, stand transferred on the Effective Date from the Transferor Company to the Transferee Company without consideration as a transfer of property from a trustee to a beneficiary."
(emphasis supplied) The submission which has found acceptance with the Tribunal on an interpretation of the provisions extracted above was that the transfer of assets would be deemed to have occurred only on the date when the High Court sanctioned the Scheme, meaning thereby the "effective date" and not on the "appointed date". Insofar as the taxability under Section 3-F is concerned what has weighed with the Tribunal is that the moveable machinery items were consigned within the State of U.P. and were also received by the Transferee Company within the State, therefore, justifying a levy of tax under the U.P. statute.
Insofar as the question of taxability of molasses is concerned, this may be dispensed at the very outset since learned counsel for the parties do not dispute the fact that during the relevant assessment year an administrative charge was being levied on its sale and purchase of under the U.P. Sheera Niyantran Adhiniyam, 1964 and that therefore there could not have been a levy of tax under the 1948 Act. This issue undisputedly stands settled in favour of the assessee in light of the decision rendered by a Division Bench of the Court in M/s. SAF Yeast Co. Pvt Ltd Vs. State of U.P. and another1.
That leaves the Court to only consider the two other submissions which have been advanced by Shri Agrawal in his challenge to the order of the Tribunal.
The submission of Shri Agrawal was that there could be no sale or purchase of machinery between the Transferor and Transferee companies since the assets stood transferred and vested in the Transferee Company in terms of the Scheme of Arrangement and by operation of law. His submission was that the Scheme once sanctioned by the High Court would be liable to be read as coming into effect from the "appointed date" and therefore there could be no levy of tax on the transaction in question. Insofar as the issue of a taxability under Section 3-F of the 1948 Act is concerned, Shri Agrawal has placed reliance upon the decision rendered by a Constitution Bench of the Supreme Court in 20th Century Finance Corporation Ltd and another Vs. State of Maharashtra2 to submit that admittedly the agreement which transferred the right to use and was the sole repository of the bargain between the parties was executed in New Delhi and therefore outside the State of U.P. His submission was that since the agreement transferring a right to use was executed outside the State, no tax could have possibly been levied under section 3-F of the 1948 Act.
Shri Tripathi, learned standing counsel appearing for the State respondents has sought to support the order of the Tribunal by submitting that since the machinery in respect of which the right to use was consigned to the State of U.P. and was present within the territorial limits of the State, levy of a tax on the transaction was justified.
Having noticed the rival submissions, the Court at the outset notes that the submission of Shri Agrawal with respect to a retrospective operation of the provisions of the Scheme of Arrangement would not commend acceptance. Although the Scheme of Arrangement itself referred to the appointed to be 1 October 1997, the crucial issue which would merit consideration would be the date on which the assets of the Transferor Company were provided to vest in the Transferee Company. The answer to this question rests upon the terms of clause 2.7 which has already been extracted hereinabove. A careful perusal of clause 2.7 clearly establishes that all properties and assets owned, held or acquired and investments made by the Transferor Company on or after the appointed date were for all purposes deemed to have been owned, held or acquired by it as a trustee for the benefit of the Transferee Company. Clause 2.7 further provides that the transfer and vesting of such assets would be effected without any further act or deed except for the order of the High Court sanctioning the same. More fundamentally clause 2.7 provides that this transfer without any further act or deed would be recognized to have come into effect on the "effective date" and not the "appointed date". In view thereof this Court is of the considered opinion that the Tribunal was correct insofar as it holds that the transfer of assets was to came into effect only from the "effective date". Although Sri Agarwal had additionally submitted that there is a lack of an element of sale under a Scheme of Arrangement, this contention too would not merit acceptance in light of the decision of the Supreme Court in Hindustan Lever Vs. State of Maharashtra3. However the findings on the above two issues would not be determinative of the question which essentially arises in this revision. The seminal issue is of taxability under section 3-F of the 1948 Act and whether the transfer of the right to use in the facts of the present case would be exigible to tax by the respondents.
The issue of tax upon a "transfer of a right to use" was elaborately dealt with in 20th Century Finance and it would be the principles enunciated in the said decision which must govern an answer to the question posed. In order to answer the same, it would be appropriate to note the following observations as they appear in the judgment of the Constitution Bench in 20th Century Finance:-
27. Article 366 (29-A) (d) further shows that levy of tax is not on use of goods but on the transfer of the right to use goods. The right to use goods accrues only on account of the transfer of right. In other words, right to use arises only on the transfer of such a right and unless there is transfer of right, the right to use does not arise. Therefore, it is the transfer which is sine qua non for the right to use any goods. If the goods are available, the transfer of the right to use takes place when the contract in respect thereof is executed. As soon as the contract is executed, the right is vested in the lessee. Thus, the situs of taxable event of such a tax would be the transfer which legally transfers the right to use goods. In other words, if the goods are available irrespective of the fact where the goods are located and a written contract is entered into between the parties, the taxable event on such a deemed sale would be the execution of the contract for the transfer of right to use goods. But in case of an oral or implied transfer of the right to use goods it may be effected by the delivery of the goods.
28. No authority of this Court has been shown on behalf of respondents that there would be no completed transfer of right to use goods unless the goods are delivered. Thus, the delivery of goods cannot constitute a basis for levy of tax on the transfer of right to use any goods. We are, therefore, of the view that where the goods are in existence, the taxable event on the transfer of the right to use goods occurs when a contract is executed between the lessor and the lessee and situs of sale of such a deemed sale would be the place where the contract in respect thereof is executed. Thus, where goods to be transferred are available and a written contract is executed between the parties, it is at that point situs of taxable event on the transfer of right to use goods would occur and situs of sale of such a transaction would be the place where the contract is executed."
(emphasis supplied) From the above extract, it is clear that for the purposes of a levy of tax under Section 3-F, the presence of machinery within the State is not determinative. The taxable event which stands encompassed under section 3-F must and can only be a transfer of a right to use. The situs of such a transaction can only be the place where this right is transferred and conferred. Admittedly here the transfer of a right to use was effected outside the State of U.P. consequent to the execution of the lease agreement. The essential element of the levy, therefore, occurred outside the jurisdiction of this State. There was no element of a "transfer of a right to use" which occurred within this State. The moment the agreement came to be executed there sprung into existence a transfer of a right to use machinery. Therefore for the purposes of a "transfer of a right to use", the rights and obligations of parties came to be created outside this State. The State of U.P. clearly, therefore, stood denuded of the right or authority to tax this transaction. In view thereof, the position taken by the respondent that the presence of the machinery or its consignment into the State would justify the imposition of tax is rendered unsustainable.
It would be apposite to note that a similar contention with respect to taxability of such a transaction found acceptance before the Bombay High Court which took the view that it was only upon delivery of the machinery that the right to use stood crystallised. It was this very view taken by the Bombay High Court which was negatived in 20th Century Finance. This would be evident from the following passages of the decision of the Constitution Bench:-
29. Learned counsel representing the respondent States contended that by virtue of application of Section 4 of the Central Sales Tax Act, State Legislatures are competent to enact law imposing tax on the transfer of right to use goods if the goods are located for use within their States and placed reliance on the decision of this Court in Second Gannon Dunkerley & Co. [(1993) 1 SCC 364] The relevant passage of the said judgment runs as under: (SCC p. 393, para 44) "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."
30. The aforesaid contention advanced has no merit and reliance on Second Gannon Dunkerley & Co. [(1993) 1 SCC 364] is totally misplaced. It may be noted that after the Forty-sixth Amendment of the Constitution, the definition of "sale" in the Central Sales Tax Act has not been amended and further this Court in Second Gannon Dunkerley case [(1993) 1 SCC 364] was dealing with the question of levy of sales tax on works contract as envisaged in Article 366(29-A)(b) and not under Article 366(29-A)(d). In Second Gannon Dunkerley case [(1993) 1 SCC 364] this Court has construed sub-clause (b) of clause (29-A) of Article 366 as conferring power to split the single and indivisible contract into one for sale of goods and the other for supply of labour and services and as a result such a contract which was single and indivisible has been brought on a par with a contract containing two separate agreements. Since tax was held as tax on sales of goods, therefore, it was held that principles contained in Section 4 of the Central Sales Tax Act would apply to transaction of works contract as envisaged in clause (29-A)(b) of Article 366. Moreover, the transactions contemplated under Section 4 of the Central Sales Tax Act involve a series of events and for that reason it has no application to the present case.
32. Coming to the question that a transaction in question is in the nature of a contract of bailment, it is true that the High Court of Bombay in the judgment under appeal has taken the view that the transactions of the transfer of the right to use goods are in the nature of bailment. If such a view is taken then the State would not have the power to levy sales tax on such transactions. Unless such transaction is held to be a sale or deemed sale in law, it is only then the State Legislature would be competent to enact law to levy tax under Entry 54 of List II of the Seventh Schedule. The levy of tax is not on use of goods but on the transfer of right to use goods. The High Court proceeded on the footing that the transfer of right to use is different from sale or deemed sale without considering the legal fiction engrafted in clause (29-A) of Article 366 of the Constitution. We are, therefore, of the view that the reasoning of the High Court in upholding the explanation to Section 2(10) of the Act is not tenable in law. This question is also related to another question which falls to be considered, namely, whether the State of Maharashtra can levy tax on the transaction which is an inter-State sale. The Bombay High Court expressed the view that in case of transfer of right to use goods when agreement is made in one State for giving delivery of goods for use by the lessee in another State, the movement precedes a transfer of right to use i.e. the movement is antecedent to the completed transaction and only upon delivery of goods the transfer of right to use is completed as the transfer of right to use goods is not concluded merely by execution of an agreement or document. In view of the fact that the transaction in question is deemed sale and the definition of "sale" in the Central Sales Tax Act is not amended, the said reasoning of the High Court is not only erroneous, but runs contrary to two decisions of this Court -- (i) Builders' Assn. of India [(1989) 2 SCC 645 : 1989 SCC (Tax) 317] , and (ii) Gannon Dunkerley and Co. [(1993) 1 SCC 364] wherein, it was categorically held that, in the determination of inter-State character of sale the situs of sale is immaterial. When goods are entrusted to a common carrier for delivery, it amounts to delivery to consignee. If it takes place outside the State, the fact that subsequently the goods have reached the State where they are put to use, cannot be a ground for determining the tax liability on the ground that the goods are located in that State for use."
In conclusion, this Court is of the considered view that while the Tribunal was correct in negativing the submission advanced on behalf of the assessee relating to the "appointed date", the levy of tax on the basis of a "transfer of a right to use" cannot be sustained.
Accordingly and for the reasons noted above, these revisions shall stand allowed. The order of the Tribunal dated 13 June 2006 is hereby set aside.
Order Date: - 27 November 2017 (Yashwant Varma, J.)
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