1998 (6) TMI 543 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Validity of Section 5-C and Explanation (3)(d) of Section 2(1)(t) of the Karnataka Sales Tax Act, 1957.
2. Legislative competence of the State Legislature to levy tax on leasing transactions involving the transfer of the right to use goods.
3. Applicability of the 46th Constitutional Amendment and Article 366(29A) in defining "sale."
4. Exclusion of inter-State sales and export sales from the purview of the Karnataka Sales Tax Act.
5. Interpretation of "sale" under the Central Sales Tax Act and its implications on the Karnataka Sales Tax Act.

Detailed Analysis:

1. Validity of Section 5-C and Explanation (3)(d) of Section 2(1)(t) of the Karnataka Sales Tax Act, 1957:
The court examined the validity of Section 5-C, which levies tax on the transfer of the right to use goods, and Explanation (3)(d) of Section 2(1)(t), which deems such transfers to have taken place within the State if the goods are used within the State. The court upheld these provisions, stating that they are not ultra vires the Constitution. The court emphasized that these provisions are subject to exclusions for inter-State trade, commerce, and export sales as outlined in the Act itself.

2. Legislative Competence of the State Legislature to Levy Tax on Leasing Transactions:
The court discussed the legislative competence of the State Legislature to impose tax on leasing transactions involving the transfer of the right to use goods. It was noted that the 46th Constitutional Amendment Act of 1982, which inserted clause (29A) in Article 366, expanded the definition of "sale" to include such transfers. The court referenced previous judgments, including Builders Association of India v. Union of India and Gannon Dunkerley & Co., to affirm that the State Legislature has the authority to levy such taxes, provided they do not infringe upon inter-State trade or commerce.

3. Applicability of the 46th Constitutional Amendment and Article 366(29A):
The court highlighted that the 46th Constitutional Amendment Act of 1982, which inserted clause (29A) in Article 366, was intended to broaden the definition of "sale" to include various forms of transactions, including the transfer of the right to use goods. This amendment was made to address tax avoidance practices and to ensure that such transactions are subject to sales tax. The court reiterated that the amendment allows State Legislatures to levy taxes on these transactions, provided they adhere to constitutional restrictions.

4. Exclusion of Inter-State Sales and Export Sales:
The court emphasized that inter-State sales and export sales are excluded from the purview of the Karnataka Sales Tax Act. This exclusion is explicitly mentioned in Explanation (3)(a) to Section 2(t) of the Act. The court referenced several judgments, including Builders Association of India v. State of Karnataka and Gannon Dunkerley & Co. v. State of Rajasthan, to support the view that State Legislatures cannot impose taxes on transactions that fall within the scope of inter-State trade, commerce, or export.

5. Interpretation of "Sale" Under the Central Sales Tax Act:
The court discussed the definition of "sale" under the Central Sales Tax Act, 1956, which includes the transfer of property in goods for valuable consideration. However, the definition was not amended to include the transfer of the right to use goods, as expanded by the 46th Constitutional Amendment. The court noted that while the Karnataka Sales Tax Act has been aligned with the constitutional amendment, the Central Sales Tax Act has not been similarly amended. The court concluded that transactions involving the transfer of the right to use goods should be treated as deemed sales under the local Act and should be governed by the principles of inter-State trade and commerce as per the Central Sales Tax Act.

Conclusion:
The court disposed of all the writ petitions, quashed the assessment orders, and directed the assessing authority to re-examine the transactions to exclude those that fall within the scope of inter-State trade and commerce or export. The court upheld the validity of Section 5-C and Explanation (3)(d) of Section 2(1)(t) of the Karnataka Sales Tax Act, affirming the State Legislature's competence to levy taxes on the transfer of the right to use goods, subject to constitutional limitations.