2000 Supreme(SC) 1013

2000(4) Supreme 534
SUPREME COURT OF INDIA
(From Bombay High Court)
S.P. Bharucha, B.N. Kirpal, V.N. Khare, S.S. Mohammed Quadri & D.P. Mohapatra, JJ.
20th Century Finance Corpn. Ltd. & Anr. etc. etc. —Appellants
versus
State of Maharashtra —Respondent
Civil Appeal No. 4500 of 1989
With
W.P. (C) Nos. 671/1990, 641/1992, C.A. Nos. 3438/1990, 3436/1990, 3437/1990, 3435/1990, 3347/1990, T.C. No. 91/1991, W.P. (C) Nos. 638/1992, 640/1992, 642/1992, 964/1992, 965/1992 and C.A. Nos. 6218-23/1995
Decided on 9-5-2000
Counsel for the Parties :
For the Appearing Parties : C.S. Vaidyanathan, Additional Solicitor General, K. Para­saran, R.F. Nariman, Harish N. Salve, Sunil Dogra, R.B. Mehrotra, R.F. Nariman, S.K. Dholakia, B. Sen, A.K. Ganguli, Adarsh Goel, Dr. V. Gauri Shankar, Sr. Advocates, K.J. John, P. Venugopal, P. Sudhir, V. Balachandran, Parag P. Tripathi, Ms. Swati Singh, Ms. Neelima Tripa­thi, S. Aravindh, Senthil Jagadeesan, Ms. Monica Sharma, (A.K. Goel), Additional Advocate General for U.P.), Kavin Gulati, R.B. Misra, C. Sidharth, R.C. Verma, Krishnamurthi, Swami, G. Umapathy, Pradeep P. Tiwari, A. Raghunath, S. Srinivasan, Ms. Nina Gupta, Ms. Arpita Roy Choudhary, Ms. Tania Bery, Sanjay Katyal, Sanjay Choudhary, Vineet Kumar, Yashank Adhyaru, P.K. Jain, Mrs. Urmila Sirur, Mrs. B. Sunita Rao, D.P. Mukherjee, Mrs. Kamini Jaiswal, G.B. Sathe, Ashish Dholakia, Dilip Sen, J.R. Das, D. Krishnan, V. Krishnamurthy, A. Mariarputham, T. Harish Kumar, V. Rama Subramaniam, D. Goburdhan, Ms. Pinky Anand, Ms. Geeta Luthra, M. Veerappa, K.H. Nobin Singh, Manish Mohan, Neeraj Kr. Jain, Ms. Amita Gupta, Mahabir Singh, A.S. Bhasme, K.R. Nambiar, Ranjan Mukherjee, Mrs. Sumita Mukherjee, K. Ram Kumar, Ms. Santinaray­an, Y. Subba Rao, (B. Sridhar) Advocate for G. Prabhakar, Sushil Jain, Pradeep Agrawal, Prakash Shrivastva, A. Mishra, Ms. Anjali Doshi, Dilip Tandon, Ms. Neera Gupta, M. Shivram, R.C. Verma, P. Parmeswaran, S.N. Terdol, Mrs. Shureshtha Bagga, Advocates.

Important Points
1. The States in exercise of power under Entry 54 of List II read with Article 366 (29A)(d) are not competent to levy sales tax on the transfer of right to use goods, which is a deemed sale, if such sale takes place outside the State or is a sale in the course of inter-State trade or commerce or is a sale in the course of import or export.
2. The appropriate legislature by creating legal fiction can fix situs of sale. In the absence of any such legal fiction the situs of sale in case of the transaction of transfer of right to use any goods would be the place where the property in goods passes, i.e. where the written agreement transferring the right to use is executed.
3. Where the goods are available for the transfer of right to use the taxable event on the transfer of right to use any goods is on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use.
4. In cases where goods are not in existence or where there is an oral or implied transfer of the right to use goods, such transactions may be effected by the delivery of the goods. In such cases the taxable event would be on the delivery of goods.
5. The transaction of transfer of right to use goods cannot be termed as contract of bailment as it is deemed sale within the meaning of legal fiction engrafted in clause (29A)(d) of Article 366 of the Constitution wherein the location or delivery of goods to put to use is immaterial.

Headnote:(i) Constitution of India—Article 366(29A)(d) read with Article 286 and Entry 54 of List II of Seventh Schedule—Tax on the transfer of right to use any goods for any purpose—Power of State Legislatures to levy—State Legislatures not competent to enact law imposing tax on transactions of right to use any goods which take place in course of inter-State trade or commerce—Situs of sale or purchase is wholly immaterial as regards inter-State trade or commerce —State legislature cannot by law treat sales outside State and sale in course of import as sales within State by ­fixing situs of sale within State in defini­tion of sale—Location or deli­very of goods within State cannot be made basis for levy of tax on sales of goods—State cannot levy tax on ­basis one of events in chain of events has taken place within State—Situs of sale would be where property in goods passes, namely where contract is entered into—Taxable event is transfer of right to use goods regardless of when or whether goods are delivered for use—Transfer of right to use is sine qua non for right to use any goods—If goods are available transfer of right to use takes place when contract is executed —In case of oral or implied transfer of right to use goods it may be effected by delivery of goods.

       The power of States legislatures to enact law to levy tax on the transfer of right to use any goods under Entry 54 of List II of Seventh Schedule has two limitations - one arising out of the Entry itself; which is subject to Entry 92-A of List I, and the other flowing from the restrictions embodied in Article 286. By virtue of Entry 92-A of List I, Parliament has power to legislate in regard to taxes on sales or purchase of goods other than newspapers where such sale or purchase takes place in the course of inter-State trade or commerce. Article 269 provides for levy and collection of such taxes. Because of these restrictions, States legislatures are not competent to enact law imposing impose tax on the transactions of transfer of right to use any goods which take place in the course of inter-State trade or commerce. Further, by virtue of clause (1) of Article 286, the State legislature is precluded to make law imposing tax on the transac­tions of transfer of right to use any goods where such deemed sales take place (a) outside the State and (b) in the course of import of goods into the territory of India. Yet, there are other limitations on the taxing power of the State legislature by virtue of clause (3) of Article 286. Although Parliament has enacted law under clause (3)(a) of Article 286 but no law so far has been enacted by Parliament under clause (3)(b) of Article 286. When such law is enacted by Parliament, the State legislature would be required to exercise its legislative power in conformity with such law. Thus, what we have stated above, are the limita­tions on the powers of States legislatures on levy of sales tax on deemed sales envisaged under sub-clause (d) of clause (29A) of Article 366 of the Constitution. (Para 19)

       While examining the power of States legislatures under Entry 54 of List II in earlier part of this judgment, we have noticed that the situs of the sale or purchase is wholly immaterial as regards the inter-State trade or commerce, as held in Bengal Immunity Co. Ltd.’s case. Further, the State legislature cannot by law, treat sales outside the State and sales in the course of import as ‘sales within the State’ by fixing the situs of sales within its State in the definition of sale, as it is within the exclusive domain of the appropriate legislature, i.e. Parliament to fix the location of sale by creating legal fiction otherwise. (Para 20)

       It may be noted that the transactions contemplated under sub-clause (a) to (f) of clause (29A) of Article 366 are not actual sales within the meaning of ‘sale’ but are deemed sales by legal fiction created therein. The situs of sale can only be fixed either by the appropriate legislature or by Judge made law. (Para 21)

       The location or delivery of goods within the State cannot be made a basis for levy of tax on sales of goods. Under general law, merely because the goods are located or delivery of which has been effected for use within the State would not be the situs of deemed sale for levy of tax if the transfer of right to use has taken place in another State. There­fore, the contention, on behalf of the respondents that there would be no completed transfer of right to use goods till the goods are delivered is to prevail, then the respondents are further required to show that the contract of transfer of right to use goods is also entered into in the said State in which the goods are located or delivered for use. The State cannot levy a tax on the basis that one of the events in the chain of events has taken place within the State. The delivery of goods may be one of the elements of transfer of right to use, but the same would not be the condition precedent for a contract of transfer of right to use goods. Where a party has entered into a formal contract and the goods are available for delivery irrespective of the place where they are located, the situs of such sale would be where the property in goods passes, namely, where the contract is entered into. (Para 25)

       Article 366(29A)(d) empowers the State legislature to enact law imposing sales tax on the transfer of the right to use goods. The various sub-clauses of clause (29A) of Article 366 permit the imposition of tax thus : sub-clause (a) on transfer of property in goods; sub-clause (b) on transfer of property in goods; sub-clause (c) on delivery of goods; sub-clause (d) on transfer of the right to use goods; sub-clause (e) on supply of goods; and sub-clause (f) on supply of services. The words “and such trans­fer, delivery or supply....” In the latter portion of clause (29A), therefore, refer to the words transfer, delivery and supply, as applicable, used in the various sub-clauses. Thus, the transfer of goods will be a deemed sale in the cases of sub-clauses (a) and (b), the delivery of goods will be a deemed sale in case of sub-clause (c), the supply of goods and services respectively will be deemed sales in the cases of sub-clauses (e) and (f) and the transfer of the right to use any goods will be a deemed sale in the case of sub-clause (d). Clause (29A) cannot, in our view, be read as implying that the tax under sub-clause (d) is to be imposed not on the transfer of the right to use goods but on the delivery of the goods for use. Nor, in our view, can a transfer of the right to use goods in sub-clause (d) of clause (29A) be equated with the third sort of bailment referred to in “Bailment” by Palmer, 1979 edition, page 88. The third sort referred to there is when goods are left with the bailee to be used by him for hire, which implies the transfer of the goods to the bailee. In the case of sub-clause (d), the goods are not required to be left with the transferee. All that is required is that there is a transfer of the right to use the goods. In our view, therefore, on a plain construction of sub-clause (d) of Clause (29A), the taxable event is the transfer of the right to use the goods regardless of when or whether the goods are deliv­ered for use. What is required is that the goods should be in existence so that they may be used. And further contract in respect thereof is also required to be executed. Given that, the locus of the deemed sale is the place where the right to use the goods is transferred. Where the goods are when the right to use them is transferred is of no relevance to the locus of the deemed sale. Also of no relevance to the deemed sale is where the goods are delivered for use pursuant to the transfer of the right to use them, though it may be that in the case of an oral or implied transfer of the right to use goods, it is effected by the deliv­ery of the goods. (Para 26)

       Article 366(29A)(d) further shows that levy of tax is not on use of goods but on the transfer of the right to use goods. The right to use goods accrues only on account of the transfer of right. In other words, right to use arises only on the transfer of such a right and unless there is transfer of right, the right to use does not arise. Therefore, it is the transfer which is sine qua non for the right to use any goods. If the goods are available, the transfer of the right to use takes place when the contract in respect thereof is executed. As soon as the contract is executed, the right is vested in the lessee. Thus, the situs of taxable event of such a tax would be the transfer which legal­ly transfers the right to use goods. In other words, if the goods are available irrespective of the fact where the goods are locat­ed and a written contract is entered into between the parties, the taxable event on such a deemed sale would be the execution of the contract for the transfer of right to use goods. But in case of an oral or implied transfer of the right to use goods it may be effected by the delivery of the goods. (Para 27)

       The delivery of goods cannot constitute a basis for levy of tax on the transfer of right to use any goods. Where the goods are in existence, the taxable event on the trans­fer of the right to use goods occurs when a contract is executed between the lessor and the lessee and situs of sale of such a deemed sale would be the place where the contract in respect thereof is executed. Thus, where goods to be transferred are available and a written contract is executed between the parties, it is at that point situs of taxable event on the transfer of right to use goods would occur and situs of sale of such a trans­action would be the place where the contract is executed. (Para 28)

       Situs of sale can only be fixed by the appropriate legislature by creating a legal fiction like omitted explanation to Article 286(1)(a) but situs of sale cannot be fixed by analogy of Section 4 of the Central Sales Tax Act. (Para 31)

       As a result of the aforesaid discussion our conclusions are these :

       (a) The States in exercise of power under Entry 54 of List II read with Article 366(29A)(d) are not competent to levy sales tax on the transfer of right to use goods, which is a deemed sale, if such sale takes place outside the State or is a sale in the course of inter-State trade or commerce or is a sale in the course of import or export.

       (b) The appropriate legislature by creating legal fiction can fix situs of sale. In the absence of any such legal fiction the situs of sale in case of the transaction of transfer of right to use any goods would be the place where the property in goods passes, i.e. where the written agreement transferring the right to use is executed.

       (c) Where the goods are available for the transfer of right to use the taxable event on the transfer of right to use any goods is on the transfer which results in right to use and the situs of sale would be the place where the contract is executed and not where the goods are located for use.

       (d) In cases where goods are not in existence or where there is an oral or implied transfer of the right to use goods, such transactions may be effected by the delivery of the goods. In such cases the taxable event would be on the delivery of goods.

       (e) The transaction of transfer of right to use goods cannot be termed as contract of bailment as it is deemed sale within the meaning of legal fiction engrafted in clause (29A)(d) of Article 366 of the Constitution wherein the location or delivery of goods to put to use is immaterial.

       (Para 35)

       (ii) Maharashtra Sales Tax on Transfer of Right to Use Any Goods for Any Purpose Act, 1985—Section 2(10)—Explanation—Transgresses limits of legislative power—Explanation shall be read down to the effect that it would not be applicable to transaction of transfer of right to use any goods if such deemed sale is an outside sale, sale is in course of import of goods into or export of goods out of territory of India and an inter-State sale. (Para 38)

       (iii) Karnataka Sales Tax Act, 1957—Section 2(t) read with Section 5—‘Sale’—Definition of—Tax on transfer of right to use any goods—Explanation 3(d) to Section 2(t) widening ambit of definition of sale to include sales outside State and sales occasioning import of goods into ­India merely on premises that goods put to use are located within State— Explanation in excess of legislative power—Explanation 3(d) to Section 2(t) shall be read down to the 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 course of the import of the goods into or export of the goods out of the territory of India and (iii) an inter-State sale.

       A perusal of Explanation 3(d) to Section 2(t) shows that the transfer of right to use any goods would be deemed to have taken place in the State of Karnataka if the goods are for use within the State irrespective of the place where the contract of 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. 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 course of the import of the goods into or export of the goods out of the territory of India and (iii) an inter-State sale. (Para 40)

       (iv) Tamil Nadu General Sales Tax Act, 1959—Section 2(n)—Explanation (3)(a)—‘Sale’—Definition of—Explanation 3(a) of Section 2(n) is in excess of power of State legislature— 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 transaction of deemed sale is (i) an outside sale; (ii) the sale which occasioned the import of goods into India; and (iii) an inter-State sale.

       Explanation 3(a) to Section 2(n) of the Act is in excess of power under Entry 54 of List II of the Seventh Schedule so far as it relates to the transactions of transfer of right to use any goods are concerned. Since the said Explanation is in the general provisions of the Act, we direct that Explanation 3(a) to Section 2(n) 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 transaction of deemed sale is (i) an outside sale; (ii) the sale which occasioned the import of goods into India; and (iii) an inter-State sale. (Para 41)

       (v) Haryana Sales Tax Act, 1973—Section 2(1)—Note (4)—Sale—Definition of—Deemed sale in State—Note (4) widens ambit of definition of sale’ by including outside sale, inter-State sale and import into territory of India —Note (4) to Section 2(e) 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 course of the import of the goods into or export of the goods out of the territory of India and (iii) an inter-State sale. (Para 42)

       (vi) Uttar Pradesh Trade Tax Act, 1948—Section 2(h)—Explanation I(ii)—Sale—Definition of—Deemed sale in State—Explanation I(ii) widens sale by including ‘outside sale’ as ‘inside sale’ on mere loca­tion of goods for use within State—Explanation I(ii) is in excess of legislative power of State Legislature—Clause (ii) of Explanation I of Section 2(h) of the Act shall be read down to this effect that it would not be applicable to the trans­action of transfer of right to use any goods if such deemed sale is (i) an outside sale, (ii) sale in course of the import of the goods into or export of the goods out of the territory of India and (iii) an inter-State sale. (Para 45)

       (vii) Andhra Pradesh General Sales Tax Act, 1957—Section 2(n) read with Sec­tion 5E—Explanation IV—Sale—Definition of —Deemed Sale—Clause (6) of Section 5E is in excess of legislative power of State—Clause (b) of 5E shall be read down to this effect that it would not be applicable to the trans­action of transfer of right to use any goods if such deemed sale is (i) an outside sale, (ii) sale in course of the import of the goods into or export of the goods out of the territory of India and (iii) an inter-State sale. (Para 52)