2014 (8) TMI 259 - HC - VAT and Sales Tax

Whether a State can levy sales tax on transfer of right to use goods merely on the basis that the goods put to use are located within its State irrespective of the facts that-(a) the contract of transfer of right to use has been executed outside the State; (b) sale has taken place in the course of an inter-State trade; and (c) sales are in the course of export or import into the territory of India? Held that - In the light of discussion, as the equipment involved was unspecified goods and indeed an order for purchase of an unspecified equipment was made by the respondent after the lease, the respondent did not become owner of the equipment till the same was despatched to the hirer so the transaction under sub-clause (d) could be complete only after the completion of the sale of the equipment which happened only when the equipment was actually delivered to the hirer in Hyderabad (Andhra Pradesh). Therefore, the transaction of deemed sale under sub-clause (d) cannot be said to be complete on the execution of the contract of master lease. If that be so, the question of the deemed sale being an inter-State sale would not arise In the instant case, the purchase of the equipment was by the respondent, the fact that the hirer wanted to hire the equipment might have prompted the respondent to place an order for its purchase but that fact is irrelevant in arriving at the conclusion whether the lease in respect of non-existent unspecified equipment would be complete on the execution of the master lease. On this aspect, we have held that before an unspecified equipment reaches the hirer, the sale of the equipment by the respondent itself would not be complete. The deemed sale under sub-clause (d) is only a consequential transaction which follows the completion of the sale in favour of the respondent and cannot precede it. - Following decision of 20th Century Finance Corporation Ltd and another Vs. State of Maharashtra 2000 (5) TMI 980 - SUPREME COURT OF INDIA - Decided against Revenue.

Summary

Issues:
Interpretation of situs of deemed sale in relation to the conditions of the agreement.

Analysis:
The judgment in question involves the interpretation of the situs of a deemed sale in a specific case. The central issue revolves around whether the Tribunal was correct in determining that the situs of the deemed sale was in New Delhi without considering the conditions and details of the agreement in question. The key legal principle relied upon in this judgment is drawn from a Constitution Bench decision of the Apex Court in 20th Century Finance Corporation Ltd and another Vs. State of Maharashtra. The Court in this case emphasized that the taxable event for the transfer of the right to use goods occurs when a contract is executed between the lessor and the lessee. The situs of the sale in such a deemed transaction is determined by the place where the contract is executed. The judgment further clarifies that the transfer of the right to use goods cannot be equated to a contract of bailment, as it constitutes a deemed sale under the legal fiction enshrined in the Constitution.

The judgment delves into the distinction between the transfer of the right to use goods and the actual sale of goods. It highlights that the levy of tax is not based on the use of goods but on the transfer of the right to use goods. The Court rejects the argument that the movement of goods is a prerequisite for the completion of the transaction, emphasizing that the transfer of the right to use goods is not contingent on the physical delivery of goods. Instead, the taxable event occurs upon the execution of a written agreement transferring the right to use goods. The judgment clarifies that in cases where goods are not physically present or there is an oral or implied transfer of the right to use goods, the taxable event may be triggered by the delivery of goods.

Furthermore, the judgment establishes that the States do not have the authority to levy sales tax on the transfer of the right to use goods if the deemed sale occurs outside the State, in the course of inter-State trade, or in the course of import or export. The legal analysis provided in the judgment underscores the significance of legal fiction in determining the situs of sale in transactions involving the transfer of the right to use goods. It concludes that the appropriate legislature can establish the situs of sale through legal fiction, but in the absence of such provisions, the place where the contract is executed dictates the situs of the sale. Ultimately, the judgment rules in favor of the assessee, dismissing the revision and upholding the interpretation of the situs of the deemed sale in the case at hand based on the principles elucidated in the Constitution Bench decision.