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TMI Blog1999 (1) TMI 510X X X X Extracts X X X X X X X X Extracts X X X X ..... ibility to tax as well. We have taken care to read the prayers in each and every one of the petitioners to understand the scope of the attack and to find out the real grievance of the petitioners. We are of the opinion that a decision on the various disputes raised by the petitioners would result in a mere exercise in recapitulating the law as laid down by the Supreme Court of India and various other High Court. Most of the arguments are based on mere apprehension or the fear of incurring a huge liability by way of sales tax. To put it more accurately it is the attempt of the assessee to postpone the evil forgetting the wrath of the tax laws in imposing penalty and interest. Though almost all the petitioners have raised the issue of the validity of section 3-A, hardly any advocate had the courage to argue the said point, apparently because of the several decisions which have since been reported. No doubt a few counsel argued the validity of section 3-A with reference to articles 301 and 304 of the Constitution of India. Most of the other counsel have ended up with a request to lay down the guidelines in respect of the novel transactions arising under section 3-A and caution the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 366 of the Constitution of India it has to be remembered that clause (29A) extends the meaning of sale or purchase of goods to different forms of transaction. The transfer of property in goods involved in the execution of works contract is only one of the extended meanings coming within subclause (b) of clause (29A). In the batch of cases before us we are mostly concerned with the extended definition as contained in sub-clauses (c) and (d) of clause(29A) of article 366 of the Constitution of India. It is not seriously doubted that the judgment in Builders Association of India case [1989] 73 STC 370 (SC) would apply to the facts of the present cases as well. 3.. Close on the heels of Builders Association of India case [1989] 73 STC 370 (SC), we have yet another Supreme Court judgment again relating to works contract which conclusively holds that the sales tax laws enacted by various States following the 46th amendment are valid except to the limited extent that they are bound by the restrictions imposed by the Central Sales Tax Act and article 286 of the Constitution of India. We propose to go into the facts of [1993] 88 STC 204 (SC) (Gannon Dunkerley Co. v. State of Rajasth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessing authority between the value of goods and the supply of labour services. The apex Court has also made it clear that apart from the deductions referred to by them, it will be necessary to exclude from the value of works contract, the value of the goods which are not taxable in view of sections 3, 4 and 5 of the Central Sales Tax Act, 1956 and goods covered by sections 14 and 15 of the Central Sales Tax Act, as well as goods which are exempt from tax under the sales tax law of the State. Regarding situs, the Supreme Court observed at page 237 as follows: While defining the expression sale in the sales tax legislation it is open to the State Legislature to fix the situs of a deemed sale resulting from a transfer falling within the ambit of article 366(29A)(b) but it is not permissible for the State Legislature to define the expression sale in a way as to bring within the ambit of the taxing power a sale in the course of inter-State trade or commerce, or a sale outside the State or a sale in the course of import and export. The said observation in relation to works contract will equally apply to hire purchase transactions and transactions where the right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent was made and must have depreciated during the seventeen months when it was on hire would be valued at Rs. 6,487/6/at the time when the option is exercised and the sale in favour of the hirer takes place. This is clearly impossible to accept and therefore the contention of the respondent must also be rejected. The Supreme Court proceeded to say that the value must be something less than the original price. In order to arrive at the value at the time of the sale to the hirer, the sales tax authorities have to take into consideration the depreciation of the vehicle and such other matters as may be relevant in arriving at such price. In fact in that case, the Supreme Court remitted the case to the assessing authority for the purpose of determining the sale price after giving the above deductions. 6.. In H. Anraj v. Government of Tamil Nadu [1986] 61 STC 165 the Supreme Court considered the exigibility to tax on lottery tickets. On the first question of exigibility, the Supreme Court upheld the law stating that the levy of sales tax on lottery tickets comprises of two elements, one the entitlement to a right to participate in a draw which can be regarded as goods , properly so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Constitution of India. After the 46th Amendment of the Constitution, the Tamil Nadu Legislature enacted Tamil Nadu Act No. 28 of 1984 with effect from May 29, 1984. It is interesting to see section 3-A as it stood at that time. It was as follows: Section 3-A: Levy of tax on the right to use any goods.-Notwithstanding anything contained in section 3, 4, 5, 7 or 7-A, but subject to the other provisions of this Act, every dealer referred to in item (viii) of clause (g) of section 2 whose total turnover relating to the business of transfer of the right to use any goods for any purpose as specified therein is not less than fifty thousand rupees and every casual trader or agent of a non-resident dealer in respect of such business whatever be his turnover for the year, shall pay tax at such rate not exceeding five per cent of such turnover as may be notified by Government from time to time. The Government may notify different rates for different goods or for different classes of dealers for the purpose of this section. 10.. The words to be marked are total turnover relating to the business by transfer of the right to use any goods. Notification under section 3-A was issued in G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of their use, irrespective of the place where the lease agreement is made it must be presumed that the sale is deemed to take place within the State of Tamil Nadu. The argument is based more on apprehension because there is no room for making any inference on the basis of the section, as it stands. However, Mr. Devanathan, invites us to explanation (3) of section 2(n) defining sale . Explanation (3) is as follows: Explanation (3).-(a) The sale or purchase of goods shall be deemed, for the purposes of this Act, to have taken place in the State, wherever the contract of sale or purchase might have been made, if the goods are within the State- (i) in the case of specific or ascertained goods, at the time the contract of sale or purchase is made; and (ii) in the case of unascertained or future goods, at the time of their appropriation to the contract of sale or purchase by the seller or by the purchaser, whether the assent of the other party is prior or subsequent to such appropriation. (b) Where there is a single contract of sale or purchase of goods situated at more places than one, the provisions of clause (a) shall apply as if there were separate contracts in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar cannot be blindly applied by the assessing authorities and where it is pointed out that the statutory provisions are contrary to the circular, the assessing authorities should take note of only the statutory provisions. The above direction, in our opinion, is sufficient to take care of the circular dated August 30, 1994. We have also indicated from the judgment of the Supreme Court reported in [1993] 88 STC 204 (Gannon Dunkerley Co., v. State of Rajasthan) as to the manner of interpreting the provisions of law, namely, section 3-A with reference to the situs of the sale. It is for the assessing authorities to verify the facts of each case and apply the Supreme Court decisions to find out whether a sale has taken place within the State of Tamil Nadu. Equally, it is for the authorities to decide whether in a particular case of exemption referred to in clauses (a) to (c) of sub-section (2) of section 3-A are applicable and whether deductions to that extent are allowable. 15.. Mr. T.K. Seshadri argued that the show cause notice issued in many cases indicate that the assessing authorities are more influenced by the said circular dated August 30, 1994 rather than the statutory pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing authority to deduct from the total turnover in respect of transfer of goods involved in a works contract under section 3-B, all amounts towards labour and other like charges, etc. So also sub-rule (b) of rule 5-C obliges the assessing authority in respect of goods delivered on hire-purchase or on any such system of payment in instalments, all amounts charged as insurance charges or interest on the unpaid amounts or interest specified and charged separately without including such amounts in the price of the goods delivered. Further, all amounts relating to the cost of capital employed for financing where such charges are clearly ascertainable from the accounts. In the absence of such particulars the rules provide for a formula which again is authorised by the judgment of Supreme Court. Sub-clause (c) of rule 5-C refers to the deductions to be made in respect of the right to use any goods for any purpose under section 3-A of the Act. Since this is important for our case, we extract the said sub-clause (c) below: (c) in respect of right to use any goods for any purpose under section 3-A of the Act,- (i) all amounts for which any goods specified in the First Schedule are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out to a much higher amount than an asset purchased locally and taxed. We are of the opinion that this illustration does not carry us any further because the decision of the Supreme Court of India in Johar s case [1965] 16 STC 213 had resulted in the Tamil Nadu General Sales Tax Rules being amended and the introduction of rule 5-C which provides for various deductions in respect of the transfer of right to use goods being taxed under section 3-A. Similar deductions are authorised in respect of goods delivered and hire purchased. There is, therefore, no violation of articles 301 and 304(a) of the Constitution of India. In O.P. No. 1149 of 1998 filed by South India Film Chamber of Commerce it is further contended that in respect of deemed sales under section 3-A the total lease rentals is subjected to tax and this is discriminatory because such total lease rentals includes selling price, the rentals the interest and finance charges. This again is without any basis because section 3-A as it not stands read along with the Rules does provide for exclusion of the depreciation and other charges. We will deal with the taxation of the distribution of negative rights or copy rights over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our mind that a tax on the transfer of the right to use any goods for any purpose, takes place as soon as the transfer is effected. This is clarified by the words after sub-clause (f) which runs as follows: 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. 21.. It is no doubt ultimately deemed that in a transfer of the right to use any goods there is a sale of the goods itself. The reference to the goods is only for the purpose of the situs of the sale and the price to be measured in terms of the goods. We have already indicated that the price is arrived at after giving all the deductions contemplated by the Supreme Court in [1989] 73 STC 370 (Builders Association of India) and [1993] 88 STC 204 (Gannon Dunkerley Co.). 22.. The further argument is that the taxable event occurs when the right to use is transferred. Once the transfer is effected the deeming would refer to the sale of the related goods. In as much as section 3-A was activated by the issue of G.O.P. No. 289, dated March ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess or state of affairs so that the date when the letting or hiring had began was immaterial. They held that certain regulations to that effect were intra vires and payments made by Mrs. Freeman after April 1, 1973 for the hire of the television set were liable to tax under the new scheme of value added tax. 24.. Mr. C. Natarajan, also refers to the judgment reported in AIR 1996 SC 3025 (Collector of Central Excise v. Vazir Sultan Tobacco Co. Ltd.). That case relates to the levy of customs duty and the question arose whether the levy should be made at the time of removal of the goods and whether there was a statutory levy at the time of the taxable event. It was held that there was no levy at the time of the taxable event and therefore the levy which came into force at the time of removal of the goods cannot be sustained. In the case before us the position is totally different. The charging sections were first incorporated by Tamil Nadu Act No. 28 of 1984. Subsequently, G.O.P. No. 289/CT RE dated March 26, 1986 activated the provision. The Tamil Nadu Act No. 25 of 1993 which enacted section 3-A in the present form, is only in the nature of an amendment to the earlier chargin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, that it is inter-State sale or import sale is a question of fact and the petitioner have to wait till an order of assessment is made. Thereafter, there is a regular right of appeal to the appellate authority. We therefore, hold that in regard to the transactions under items 1 to 4 as to the exigibility to tax the assessing authorities will do well to follow the directions contained in [1989] 73 STC 370 (SC) (Builders Association of India) and [1993] 88 STC 204 (SC) (Gannon Dunkerley Co.). They cannot rely on the circular dated August 30, 1994 if the provisions of the circular run against the statute. They can no doubt look into the circular for the purpose of guidance and nothing more. 29.. We would like to further add, for the guidance of the assessing authorities that in a hire-purchase transaction or a transaction transferring the right to use goods there is definitely sale of goods. Even in [1965] 16 STC 213 (SC) (Johar s case) this has been explained by the Supreme Court. But what is important is that after the 46th Amendment, in [1989] 73 STC 370 (Builders Association of India), this aspect is elaborated on the basis of the deemed provision. While dealing with the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5] 97 STC 330 (I.T.C. Classic Finance and Services v. Commissioner of Commercial Taxes) the Andhra Pradesh High Court has taken a slightly different view. They have observed at pages 344-345 as follows: The lease agreement and the purchase order according to the Commissioner are two different and independent transactions. We are not inclined to agree. The placing of the purchase order by the assessee with the manufacturer was because of the lease agreement with the customer. Both are integrally connected; one cannot be split up from the other. The customer (M/s. Rallis India Ltd.) has already inspected the equipment, placed an order with the manufacturer on behalf of the assessee and thereafter corresponded with the assessee for confirmation and this is clear from the letter dated February 21, 1988, addressed by the customer to the assessee, which is extracted supra. Independent of the lease agreement, such a transaction could not have been possible. In the absence of the lease transaction, it is plain, there was no possibility for the assessee to place the purchase order with the manufacturer. 31.. With respect to the learned Judges who made the above observations, we are co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdings at any point of time. According to the design or plan suggested by the advertising agency or manufacturer, it is the person who erects the hoardings, who arranges for the designers and painters for displaying the advertisements. They are now aggrieved by the attempt of the Sales Tax Officer to impose a tax on the display charges from the customers. 34.. Correspondence has been going on between the petitioner and the Sales Tax Officers. Since notices have been issued proposing to impose a tax under section 3-A the petitioner have come forward with this writ petition seeking to invalidate section 3-A of the Act. The main argument addressed by Mr. C. Natarajan, is that section 3-A will not get attracted to these transactions. We have already held that the lease rentals will constitute the measure of tax for the purpose of levy under section 3-A. We have also held that there is no violation of articles 301 and 304 of the Constitution. In addition the learned counsel for the petitioner argues that the application of section 3-A will practically amount to imposition of a service tax on the petitioner. We do not think that the argument can be accepted. In Chapter V of the Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondents have jurisdiction to go into the matter, we permit them to collect necessary materials before deciding the issue whether the transactions of the petitioner are exigible to tax. In this connection there is a useful judgment of the West Bengal Taxation Tribunal reported in [1993] 89 STC 1 (Selvel Advertising Private Limited. v. Commercial Tax Officer, Alipore Charge). That was also a case of a person erecting hoarding and receiving rent, monthly or periodical in terms of a lease agreement. The argument that it was an immovable property was rejected. Further in that case it was found that there was nothing to show that possession and control of the hoardings and structure remained with the assessee during the period of the contract. This is precisely the reason why we have observed that the facts of each case have to be examined before a decision is arrived at. We stop with deciding that the hoardings should be treated as goods and when let out for display of advertisements there is a deemed sale under section 3-A. CATEGORY 6: LORRY HIRE CHARGES: 35.. There are a number of cases where the assessee own lorries and claim to retain custody with them technically. In so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here have been cases on bottles and cylinders being hired by customers on the making of a deposit. Whenever the bottles are broken or for some reason unable to be returned to the owner the proportionate deposit amount is forfeited by the owner. We have held that such forfeiture of deposit towards the cost of the bottle is taxable. In a similar way there is no difficulty in bringing to tax the cylinder retention charges subject to all the other limitations which we have already referred to. Reference may also be made to [1992] 86 STC 539 (AP) (Industrial Oxygen Company Pvt. Ltd. v. State of Andhra Pradesh). In that case an identical issue was decided. The manufacture of gases filled the same in cylinders and sold them to customers. The cylinders were given on loan to customers on a rent-free basis for a limited period. After that period, hire-charges were recovered. It was held that such hirecharges were rightly brought to tax under the extended definition of sale. We therefore, leave the entire matter to the assessing authorities to decide the issue on the basis of the materials furnished by the assessees. CATEGORY 8: TRANSFER OF RIGHTS IN CINEMATOGRAPHY FILMS: 38. The South ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TNGST Act there is certainly scope for inclusion of such transactions. Therefore, we are not inclined to prevent the authorities from issuing notices and calling for particulars. Here again, the facts on each case will have to be examined before deciding the issue one way or the other. CATEGORY 9: RIGHT TO USE SOFTWARE: 39.. There are a few cases in relation to the use of software and the income from data processing systems. W.P. No. 1400 of 1995, which is renumbered as T.P. No. 2796 of 1997 has been filed by the National Association of Software and Service Companies. The members of the association are engaged in the development of software all over India. A software is defined as a totality of programme, procedure, rules and assemblers, raised in conjunction with a computer. The programme would provide answers to problems and the method of solving the problems. The contention is that a software has no raw materials. The development of a software depends upon the skill of a person or a company. Once a programme is installed in a customer s computer, the customer can play the programme and the customer pays a fee for use for the programme. According to the petitioner it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of sale . Similarly, in [1993] 88 STC 357 (P H) (Harbans Lal v. State of Haryana) it was not only held that the amendment of the Haryana General Sales Tax Act in line with the 46th Amendment was valid, but it was also held that where a dealer gives on hire tents and furniture and the customers erected the tents and paid hire-charges for the tents, furniture and crockery, etc., there was transfer of goods within the meaning of extended definition of sale and therefore taxable. There is a direct decision of the Kerala High Court reported in [1997] 104 STC 498 (Rohini Panicker v. Additional Sales Tax Officer, First Circle, Trivandrum). It was held that the lending of video cassettes was nothing but effecting a transfer of the right to use the video cassettes and would plainly come within the extended definition of sale . The case of video cassettes of the petitioners will not be any different from the case cited above and definitely there is transfer of right to use video cassettes and therefore, the hire-charges are taxable. CATEGORY 11: SHIPS: 41.. In a group of cases filed by Mr. C. Natarajan, a question has been raised whether the right to use ships belonging to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... questioning the attempt to levy taxes on the hire of drilling units and rigs to a statutory corporation called Oil and Natural Gas Commission (ONGC) for exploring the possibilities of getting underground gas. According to the petitioner they entered into an agreement with ONGC for conducting drilling operation in the off-shore waters of India. The charges per day are fixed as per the agreement for the rig and the other drilling units. The contention is that the equipment always remained with the petitioners who are only contractors. It is contended that the rigs and the drilling units were never hired to the ONGC. The entire operation part-takes the character of works contract. The entire staff and man-power is provided by the petitioner only. Therefore, it is contended that there being no transfer of property it will not come under section 3-A. It is also vaguely pointed out that the drilling operation may be conducted outside the territorial waters of India and Tamil Nadu and therefore, the respondents will not have jurisdiction to levy tax under section 3-A. The question whether possession is handed over to ONGC or not is a matter for proof. The terms of the agreement as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases adverts to an academic case where a question may arise whether a transaction is a second sale or not while applying section 3-A of the TNGST Act. The argument is that once an item of goods is transferred with the right to use the goods, the first such transfer of right alone is taxable and all subsequent transfers will become second sales. This is a question which does not arise while considering section 3-A as it now stands. 45.. As on date, where there is a hire-purchase transaction of sale, there is no difficulty in fixing the first sale on the date of transfer of property under the First Schedule or Second Schedule to the Act in pursuance of the hire-purchase sale. In that case, if the goods are taken back for default or otherwise and again sold to another on hire-purchase basis then such a sale is second sale exempt from tax. 46.. However, where only a transfer of the right to use any goods occurs under section 3-A at the TNGST Act, if the goods have already suffered tax under the Act, then hire-charges, rentals received in respect of such goods are not liable to tax. Otherwise, the amounts, received for the right to use goods for repeated transactions are liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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