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TMI Blog2001 (8) TMI 1365X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in the activity of leasing machinery, motor vehicles, etc. The activity involves transfer of right to use the goods by the petitioner to others. The act of such transfer of right to use goods is under agreements which for convenience may be called as leasing agreements. Petitioner claims that in regard to assessment period from January 19, 1999 to March 31, 1999, petitioner declared its turnover and claimed exemption in regard to leasing (transferring the right to use) of goods purchased from registered dealers in Karnataka. It is stated an assessment order was passed on August 25, 1999 concluding the assessment granting exemption in regard to such turnover. The revisional authority (fourth respondent) issued a show cause notice dated November 27, 1999 under section 21(4) of the Act proposing to revise the assessment order dated August 25, 1999 and proposing to subject the turnover relating to lease rent received by the petitioner on the ground that levy of tax under section 5-C is a multi-point levy and the benefit of exemption is not available in regard to lease rent received by leasing of goods, even if such leased goods were purchased from registered dealers in Karnataka; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entals even if the leased machinery were tax suffered goods; and (ii) to strike down section 5-C of the Act as unconstitutional or in the alternative read down section 5-C as excluding multi-point levy of tax in respect of tax suffered goods. Re: W.P. Nos. 13585-13594 of 2000, 13598 of 2000 and 23378 of 2000: 6.. The petitioners have sought relief regarding section 5-C similar to what is sought in W.P. No. 5282 of 2000. In addition the petitioners in W.P. Nos. 13585-13594 of 2000 have sought quashing of notices dated March 3, 2000, the petitioner in W.P. No. 13598 of 2000 has sought quashing of notice dated December 23, 1999 and petitioner in W.P. No. 23378 of 2000 has sought quashing of assessment order dated March 30, 2000 and notice dated March 30, 2000. Re: W.P. Nos. 22339-22341 of 2001: 7.. The petitioner is a non-resident dealer engaged in the business of leasing equipment. Petitioner has filed these petitions for the following reliefs: (i) for quashing the assessment orders dated March 31, 2000, March 31, 2000 and March 29, 2001 and consequential demand notices dated April 15, 2000, April 15, 2000 and March 31, 2001 for the years 1995-96, 1996-97 and 1997-98; and ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Sale of Goods Act. Section 5 which is the charging section was also worded with reference to "sale" as per its general definition traceable to the Sale of Goods Act. Such position continued till insertion of clause (29A) in article 366 by the Constitution (46th Amendment) Act, 1982, defining the term "tax on the sale or purchase of goods" as follows: "(29A) 'Tax on the sale or purchase of goods' includes- (a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; (b) and (c)................. (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) and (f)................. 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." Simultaneously clause (3) of article 286 was substituted, providing that any law of a State shall, in so far as it imposes, or authorises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstitution being deemed to be with effect from April 1, 1986. The validity of section 5-C as amended by Act No. 4 of 1992 was challenged before this Court in a batch of writ petitions. This Court, by its judgment dated November 21, 1995 [Shetty Leasing (India) Ltd. v. Union of India reported in [1996] 100 STC 533] declared that section 5-C as amended by Act No. 4 of 1992 was unconstitutional and void since it provided for levy of tax on the total turnover relating to the transfer of the right to use goods which includes inter-State sales, export sales and sales outside the State. 15.. Thereafter, the State Legislature, by Amendment Act No. 5 of 1996 again substituted section 5-C with retrospective effect from April 1, 1986. The section so substituted is the same as what was originally inserted by Act No. 27 of 1985, without the amendment made by Act No. 4 of 1992. The validity of section 5-C as substituted by Act No. 5 of 1996 came up for consideration before this Court in India Equipment Leasing Ltd. v. Deputy Commissioner of Commercial Taxes reported in [1998] 111 STC 403. A learned single Judge of this Court has upheld the constitutional validity of the section. 16.. Immedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner of Commercial Taxes issued another circular dated October 23, 1999 stating that on review it was noticed that the earlier circular dated April 12, 1996, did not state the correct position of law in regard to section 5-C of the Act for the following reasons: "(i) There is a distinction between a contract of sale as defined in section 4 of the Sale of Goods Act, 1930 and a transfer of the right to use goods for any purposes. While in a transaction of 'sale' as defined under the Sale of Goods Act, there is transfer of ownership in goods and in a transaction involving transfer of the right to use goods, there is no such transfer of ownership in goods. Consequent to insertion of clause (29A)(d) to article 366 of the Constitution of India by 46th Amendment to the Constitution, Karnataka Sales Tax Act, 1957 was amended with effect from April 1, 1986 to treat the transfer of the right to use goods as deemed sale for the purposes levy of tax on such transaction. (ii) Section 5-C of the Karnataka Sales Tax Act, 1957 is an independent charging section. Section 5-C contemplates levy of tax on taxable turnover in respect of transfer of the right to use any goods specified in Seventh S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on clause at section 7 of the Amendment Act. (v) Assessments if any completed by allowing the deductions of the amounts relatable to goods purchased from another registered dealer liable to tax, such assessments shall be referred to the concerned Joint Commissioner of Commercial Taxes (Administration) immediately for initiating action under section 21 to revise the assessment order in accordance with these instructions. (vi) Where any order passed under section 21 or appeal order under section 20 is contrary to instructions issued in this circular such orders shall be referred to the Commissioner immediately for initiating action under section 22-A." 18.. In view of the instructions contained in the circular dated October 23, 1999, action has been taken by the assessing authorities under sections 12(3) or 12A or 25A or by the revisional authorities under section 21 or under section 22A of the Act and by the Intelligence Wing of the Commercial Tax Department under sections 29 and 31 of the Act. In some cases, on the basis of the proposition notices issued under section 12(3) of the Act, the assessing authorities have completed the assessments also on the basis of new circular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XIII of the Constitution, trade, commerce and intercourse throughout the territory of India shall be free. Article 303 places certain restrictions on the legislative power of the Union and the States with regard to trade and commerce. Article 304(b) provides that notwithstanding anything in article 301 or article 303, the Legislature of a State may by law, impose such reasonable restrictions on the freedom of trade, commerce or intercourse with or within that State as may be required in the public interest. The proviso to article 304 however states that no Bill or amendment for the purpose of clause (b) shall be introduced or moved in the Legislature of a State without the previous sanction of the President. 23.. The argument of the petitioners is on the premises that introduction of a new provision as per section 5-C under the KST Act amounts to a restriction on the freedom of trade, commerce or intercourse within the State. If a provision amounts to a "restriction", to be valid, it should be a reasonable restriction and the Bill or the amendment should have been moved in the Legislature with the previous sanction of the President. But, if the Bill or the amendment does not amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and consequently in their sale price. An increase in the rate of tax on a particular commodity cannot per se be said to impede free trade and commerce in that commodity........ There was no material before the High Court and no material before us to show that the impugned increase in the rate of tax on the sales and purchases of tendu leaves has put an end to that trade or has caused that trade to decline............" 24.3. In Video Electronics Pvt. Ltd. v. State of Punjab [1990] 77 STC 82; AIR 1990 SC 820, the Supreme Court held: "As is manifest, article 304 is an exception to article 301 of the Constitution. The need of taking resort to exception will arise only if the tax impugned is hit by articles 301 and 303 of the Constitution. If it is not, then article 304 of the Constitution will not come into the picture at all." 24.4. The petitioners have not placed any material nor demonstrated that imposition of tax under section 5-C imposes such a burden which can be termed as a direct and immediate restraint on the freedom of trade and commerce. Consequently, it has to be held that the amendment to the KST Act inserting section 5-C did not require the previous sanction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of right to use the goods is executed. The said Explanation 3(d) to section 2(t) widens the ambit of definition of 'sale' by including sales outside the State of Karnataka and the sales which occasioned import of goods into India, merely on the premise that goods put to use are located within the State of Karnataka irrespective of the place where the contract or transfer has taken place. This explanation is in excess of legislative power under entry 54 of List II of the Seventh Schedule. Another important aspect to notice is that the provision of section 5(3) which provides for single point taxation has been omitted in its application to section 5-C. Therefore, Explanation 3(d) to section 2(t) of the Act has to be held in excess of legislative power conferred to the State Legislature under entry 54 of List II of the Seventh Schedule to the Constitution following the reasoning given while discussing the Maharashtra Act. We, accordingly, direct that Explanation 3(d) to section 2(t) of the Act shall be read down to this effect that it would not be applicable to the transactions of transfer of right to use any goods if such deemed sale is (i) an outside sale, (ii) sale in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not to consumables. The transfer of a right to use the goods presupposes the return of the goods to the transferor at the end of the period of use. The goods which are consumable in nature cannot obviously be returned to the transferor at the end of the period of use and therefore, necessarily cannot be the subject-matter of section 5-C. That is why while the Second Schedule to the KST Act enumerating the goods which are subjected to tax under section 5(3)(a) contains both consumables and durables, the Seventh Schedule to the KST Act enumerates only durables which can be subjected to a tax under section 5-C. 28.2. In an absolute sale covered by section 5(3)(a), there is only one transfer by the dealer. The subsequent transfers, if any, will be by other dealers who acquire or purchase the goods. A dealer does not deal with the same goods more than once. But, the dealer who carries on the business of equipment leasing, covered by section 5-C can transfer the right to use the goods to a transferee, any number of times and there can be several successive transfers of the same goods by the same transferor (dealer) at different points of time in the case. 28.3. Section 5(3)(a) i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of time. 28.5. Therefore, the principles and concepts (of sale, single point levy and multi-point levy) as understood and applicable with reference to absolute sales charged to tax under section 5 cannot be imported or applied in respect of deemed sales (leases) covered by section 5-C. The provisions of section 5-C should be interpreted and applied, independently of the principles applicable to section 5(1) or 5(3)(a). 29.. Section 5-C requires every dealer to pay in each year a tax on his taxable turnover in respect of transfer of the right to use any goods mentioned in the Seventh Schedule at the rates specified in the said Schedule. The term "taxable turnover" is defined in section 2(1)(u-1) as meaning the turnover on which a dealer shall be liable to pay tax as determined after making such deductions from his total turnover and in such manner as may be prescribed, but shall not include the turnover of purchase or sale in the course of inter-State trade or commerce or in the course of export of the goods out of the territory of India or in the course of import of the goods into the territory of India. Section 5(3)(a) deals with a situation where there may be several transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is less than rupees two lakhs, he will not be liable to pay tax for that year. The effect of sub-section (6) of section 5 on section 5-C is that determination of total turnover, taxable turnover or turnover under section 5-C shall be in accordance with the Rules including rule 6. 32.. Rule 6 of the KST Rules deals with determination of total and taxable turnover. When the KST Act was amended by Act 27 of 1985, rule 6 was also amended by notification dated April 1, 1986. As a consequence in sub-rule (1), enumerating the items that will go into the determination of the "total turnover" of a dealer for the purpose of the Act, the total amount paid or payable to the dealer as the consideration for transfer of the right to use any goods for any purpose (whether or not for specified period) was included vide item(d). Sub-rule (4) provides that in determining the taxable turnover, the amount specified in clauses (a) to (p) shall, subject to the conditions specified therein, be deducted from the total turnover as determined under clauses (a) to (e) of sub-rule (1). Clause (i) of sub-rule (4) provides for deduction of all amounts for which the goods specified in the Second, Third and Four ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase transactions. The petitioners want to read the following into rule 6(4)(i): "all amounts received or receivable in respect of goods specified in Seventh Schedule, if such goods had been purchased from registered dealers liable to pay tax under the Act." But, no amount received as consideration for leasing of any goods is exempted from tax under any of the provision of the Act. Rule 6(4)(i) cannot be interpreted as referring to lease transactions as what is mentioned is "amount received or receivable in respect of goods specified in Second, Third and Fourth Schedules" and not "Seventh Schedule". The Second, Third and Fourth Schedules relate to section 5(3)(a), 5(3)(b) and 5(4). Therefore, it is not possible to hold that consideration received for the transaction of lease of tax suffered goods should be excluded for arriving at the taxable turnover. In fact, rule 6 covers three types of sales, i.e., absolute sales covered by section 5, transfer of property in goods used in works contract covered by section 5-B and transfer of right to use goods covered by section 5-C. It would have been better if separate provisions for determination of taxable turnovers relating to works c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly by the same dealer to the same lessee or to different lessees for different periods and each consideration received in regard to such leases will form part of the taxable turnover of the lessor. On the other hand, under section 5(3)(a) or 5(1) a dealer does not receive consideration more than once in regard to the same goods nor does he transfer the same goods again and again as it can happen under section 5-C. The first part of section 5-C, therefore, in no way helps the petitioners to contend that no tax could be levied under section 5-C in regard to transfer of the right to use goods which have already suffered tax in the hands of first or earlier successive dealers under section 5(3)(a). This answers the second question. The circular dated October 23, 1999 correctly interprets section 5-C. The interpretation of section 5-C and rule 6(4)(i) in the circular dated April 12, 1996 is erroneous. Re: Point No. (iii): 36.. The next point for consideration is the effect of the circulars dated April 12, 1996 and October 23, 1999. The Supreme Court in a series of cases has held that an interpretation of a provision in a taxing statute by the Commissioner or authority charged with e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two circulars even if they be found not in accordance with the correct interpretation of sub-section (2) and they depart of deviate from such construction. It is now well-settled as a result of two decisions of this Court, one in Navnit Lal C. Javeri v. K.K. Sen, AAC [1965] 56 ITR 198 and the other in Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 that circulars issued by the CBDT under section 119 of the Act are binding on all officers and persons employed in the execution of the Act even if they deviate from the provisions of the Act........." 36.2 In Rathi Alloys Steel Ltd. v. Collector, Central Excise, Jaipur (1990) 1 JT SC 353, the Supreme Court held: ".......But what cannot be overlooked is the innate injustice and hardship to which appellants have been exposed, primarily, due to action of department and Government. If the order of the Tribunal is upheld then it may result in harsh economic difficulty of some as appellants are secondary or small manufacturers who because of Board's clarification cleared the goods as steel ingots without any objection from the department. It may also lead to re-opening of matters which were closed long back. What is further significant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee can contest the validity or legality of a departmental instruction. But that right cannot be conceded to the department, more so when others have acted according to such instructions......" 36.5. In Paper Products Ltd. v. Commissioner of Central Excise (1999) 112 ELT 765 the Supreme Court held: "It is clear from the abovesaid pronouncements of this Court that, apart from the fact that the circulars issued by the Board are binding on the department, the department is precluded from challenging the correctness of the said circulars even on the ground of the same being inconsistent with the statutory provision. The ratio of the judgment of this Court further precludes the right of the department to file an appeal against the correctness of the binding nature of the circulars. Therefore, it is clear that so far as the department is concerned, whatever action it has to take, the same will have to be consistent with the circular which is in force at the relevant point of time." 36.6. In Commissioner of Sales Tax, U.P. v. Indra Industries [2001] 122 STC 100, a three Judge Bench of the Supreme Court categorically stated: "A circular by tax authorities is not binding on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessing authority, but not on the appellate authority or the courts. As the assessing authority is required to follow the circular and if he followed the circular, the department cannot challenge the order of the assessing authority on the ground that order of the assessing authority is contrary to law. If the department at any point of time, feels that circular is not valid or contrary to the provisions of law, the Commissioner will have to set right the matter by issuing a fresh circular setting out the correct position of law. Such subsequent circular when issued, will have a prospective and not a retrospective effect. 39.. Learned counsel for the Revenue referred to some decisions which have held that certain circulars are contrary to law and are not binding. But those decisions do not laid down a proposition that the assessing authority can ignore the circulars issued by the CBDT or Commissioner of Commercial Taxes. The fact that the High Court or the Supreme Court may ultimately pronounce upon the validity of the circular by either approving it or holding it to be illegal, does not mean that the assessing authority can do so, when he makes the assessment. The position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legal position enunciated by the decisions referred to above, the circular dated April 12, 1996 will apply in regard to the assessment periods April 1, 1996 to March 31, 1997, April 1, 1997 to March 3, 1998, April 1, 1998 to March 31, 1999 and April 1, 1999 to March 31, 2000. 41.. The petitioners next contended that circular dated April 12, 1996 should be made applicable even in regard to assessments between the period April 1, 1996 to March 31, 1996, as the clarifications contained in the circular dated April 12, 1996 applied to all pending assessments. 42.. There is no merit in this contention. Section 5-C in its present form was originally introduced with effect from April 1, 1986 and continued in the statute book until March 31, 1992. By amendment Act No. 4 of 1992 the words "total turnover" were substituted for the words "taxable turnover". When the amended section was declared to be invalid by this Court in Shetty Leasing [1996] 100 STC 533, section 5-C in its original form was reintroduced by Act No. 5 of 1996 with retrospective effect from April 1, 1986. Prior to April 12, 1996, there was no circular explaining the provisions of section 5-C. When the circular itsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion amounts to transfer of right to use goods is left open to be decided by the authorities with reference to the facts and circumstances of the respective cases and this decision is restricted only to declaring the correct interpretation of section 5-C and the effect of the two circulars dated April 12, 1996 and October 23, 1999. (f) As the correctness of the orders of assessment/reassessment or revisional orders, is not examined in this order, it is open to such of the petitioners who are aggrieved by any order to file appeals before the appropriate authority as per law, and if such appeals are filed within 30 days from the date of receipt of this order, they shall not be rejected on the ground of limitation. (g) In cases where notices are challenged, petitioners are given four weeks time from the date of receipt of this order to file objections. The concerned authority shall consider the same and pass appropriate orders in the light of this judgment. (h) The circular dated October 23, 1999 will not however enable the assessing authority to reopen the assessments which have attained finality in accordance with law. (i) Parties to bear their respective costs. Petitions a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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