2018 (1) TMI 339 - HC - VAT and Sales Tax

Taxability - transferring a right to use certain machinery items - Section 3-F of the U.P. Trade Tax 1948 - Held 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 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. The levy of tax on the basis of a transfer of a right to use cannot be sustained. Revision allowed.

Issues Involved:
1. Taxability under Section 3-F of the U.P. Trade Tax Act, 1948 on an agreement transferring the right to use certain machinery items.
2. Levy of tax on the sale of molasses during the assessment year in question.

Detailed Analysis:

Issue 1: Taxability under Section 3-F of the U.P. Trade Tax Act, 1948 on an agreement transferring the right to use certain machinery items.

The core issue revolves around the taxability of an agreement executed on 10 August 1993, wherein the revisionist leased machinery to M/s. Gangeshwar Ltd, allowing the latter to use the machinery. The terms of this lease were extended during the relevant assessment year. Subsequently, the two companies merged, with the revisionist being the Transferor Company and M/s. Gangeshwar Ltd being the Transferee Company. The Scheme of Arrangement was sanctioned by the Court on 6 March 2000, with the "appointed date" being 1 October 1997, and the "effective date" being the date when the certified order was filed with the Registrar of Companies.

The Tribunal's interpretation, which was accepted, stated that the transfer of assets occurred on the "effective date" and not the "appointed date." This interpretation was based on Clause 2.7 of the Scheme, which indicated that properties and assets owned, held, or acquired by the Transferor Company from the appointed date would be deemed to be held in trust for the Transferee Company and would transfer on the effective date without any further act or deed.

Shri Agrawal argued that the Scheme should be effective from the "appointed date," negating any tax liability on the transaction. However, the Court found that the Tribunal correctly held that the transfer of assets was effective only from the "effective date."

Regarding the taxability under Section 3-F, the Court referred to the decision in 20th Century Finance Corporation Ltd and another Vs. State of Maharashtra, which clarified that the taxable event is the transfer of the right to use goods, and the situs of such a transaction is where the contract is executed. Since the lease agreement was executed outside the State of U.P., the essential element of the levy occurred outside the jurisdiction of U.P., rendering the imposition of tax unsustainable.

Issue 2: Levy of tax on the sale of molasses during the assessment year in question.

The second issue concerning the levy of tax on the sale of molasses was resolved without dispute. Both parties agreed that during the relevant assessment year, an administrative charge was levied on the sale and purchase of molasses under the U.P. Sheera Niyantran Adhiniyam, 1964. Consequently, there could not have been a levy of tax under the U.P. Trade Tax Act, 1948. This issue was settled in favor of the assessee, supported by the Division Bench decision in M/s. SAF Yeast Co. Pvt Ltd Vs. State of U.P. and another 2009 UPTC 219.

Conclusion:

The Court concluded that the Tribunal was correct in its interpretation regarding the "appointed date" and "effective date." However, the levy of tax on the basis of a "transfer of a right to use" was not sustainable. The revisions were allowed, and the Tribunal's order dated 13 June 2006 was set aside.

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