Delhi High Court
Orix Auto Infrastructure ... vs Commissioner, Dvat, Delhi & Ors. on 5 February, 2015
Author: Sanjiv Khanna
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ SALES TAX APPEAL NOS. 47/2014, 49/2014 & 50/2014
Reserved on : 18th December, 2014
Date of decision: 5th February, 2015
ORIX AUTO INFRASTRUCTURE SERVICES LTD. .Appellant
Through Mr. Ashok K. Bhardwaj, Advocate.
Versus
COMMISSIONER, DVAT, DELHI & ORS. ..... Respondents
Through Mr. Rajesh Mahna, Advocate.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J.:
These three appeals under Section 81 of the Delhi Value Added Tax
Act, 2004 („Act‟, for short) impugn a common order dated 23 rd June, 2014
passed by the Appellate Tribunal, Value Added Tax („Tribunal‟, for short)
in the case of M/s. Orix Auto Infrastructure Services Limited („appellant‟,
for short).
2. STA No.49/2014 arises out from the order-in-original passed by the
Commissioner, Value Added Tax under Section 84 of the Act dated 29th
March, 2006, which has been upheld by the Tribunal in the impugned
order. STA No. 47/2014 is directed against 18 orders-in-original passed
under Section 32 of the Act for monthly tax periods from April, 2005 to
September, 2006. The said order again has been upheld by the Tribunal in
the impugned decision. STA No. 50/2014 is directed against 18 orders-in-
original for monthly tax periods April, 2005 to September, 2006 under
Section 33 of the Act imposing penalty under Section 86(10) of the Act @
100% of the tax deficiency. In the impugned order, the Tribunal has
mitigated the said penalty to 20% from 100% as imposed in the order-in-
original.
3. We frame the following substantial question of law in STA
Nos.47/2014 and 49/2014:
Whether in view of Sections 105 and 106 read with
Section 3 of the Delhi Value Added Tax Act, 2004,
lease rentals paid on or after 1st April, 2005 can be
taxed under the aforesaid Act even when the lease
agreement was executed between the parties on or
before 31st March, 2005?
4. We also frame the following substantial question of law in STA
No.50/2014:
Whether the order of the Appellate Tribunal, Value
Added Tax imposing penalty at the rate of 20% under
Section 86(10) of the Delhi Value Added Tax Act,
2004, is self contradictory and is contrary to the
mandatory pre-conditions under the said Section?.
5. The appellant-assessee is engaged in the business of leasing of
machinery and vehicles. It enters into a master lease agreement with the
hirer, which stipulates the period of lease, including the date of
commencement, lease value, lease rent, etc. The appellant-assessee
continues and remains the owner and has title and interest over the
machinery and vehicles and on expiry of the term, vehicles and machinery
have to be returned. The lessee in terms of the master lease agreement is
entitled to take on hire specific vehicles/machinery and at that time
supplementary agreement is executed in accordance with the terms and
conditions of the master lease agreement, including the term of the lease
and other stipulations.
6. Article 366(29A) was inserted by way of Forty-Sixth Amendment to
the Constitution and clause (d) thereof reads as under:-
"(29A) "tax on the sale or purchase of goods" includes-
xxx
(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;
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;"
7. The effect thereof is that the State Legislature could henceforth tax
transfer of right to use in goods for any purpose, whether or not for
specified period, for cash, deferred payment or other valuable
consideration. By deeming fiction, these were treated as sale or purchase
of goods. This had the effect of expanding the scope of the words "sale of
goods" in Entry 54 of List II, Schedule VII of the Constitution of India,
which empowers the State Governments to levy tax on sale or purchase of
goods other than newspapers. Consequent to the aforesaid constitutional
amendment, the Delhi Sales Tax on Right to Use Goods Act, 2002 („Act of
2002‟, for short), as a separate enactment, was enacted. The said
enactment was notified and came into operation with effect from 15th
September, 2004 and remained in force till 31st March, 2005. Act of 2002
was repealed by the Act, i.e., Delhi Value Added Tax Act, 2004, which
was enforced with effect from 1st April, 2005. From 15th September, 2004
till 31st March, 2005, leasing transactions under the Act of 2002 were taxed
@ 4%. However, after enforcement of the Act, i.e., Delhi Value Added
Tax Act, 2004, the rate of tax applicable to leasing transaction was the rate
prevalent on individual items, namely, motor vehicles @ 12.5%, machinery
@ 12.5%, furniture @ 12.5%, computers @ 4%, etc. It would be
appropriate to notice that the Act of 2002, i.e., Delhi Sales Tax Right on
Right to Use Goods Act, 2002 was an independent enactment and unlike
some of the other States, the Delhi Sales Tax Act, 1975 was not amended
to bring within the ambit of taxation transfer of right to use goods.
However, the Act, i.e. the Delhi Value Added Tax Act, 2004, repealed the
Act of 2002, the Delhi Sales Tax Act, 1975, the Delhi Sales on Works
Contract Act, 1999 and the Delhi Tax on Entry of Motor Vehicles into
Local Areas Act, 1994. Therefore, the Act was enacted to consolidate as
well as amend the law relating to levy of tax on sale of goods, tax on
transfer of property involved on execution of work contracts, tax on
transfer of right to use goods and tax on entry of motor vehicles by way of
introducing a value added tax regime.
8. The contention of the appellant is that the Act would be applicable
only to such agreements, which have the effect of transfer of right to use
goods executed on or after 1st April, 2005. The agreements executed prior
to 1st April, 2005 would be governed and accordingly charged to tax under
the Act of 2002 @ 4% even if the lease rentals were payable on or after 1st
April, 2005. The contention is that the taxable event is the transfer of right
to use goods and the said event had occurred when the master agreement
was executed and/or on delivery of the motor vehicle or machinery.
Payment of rental instalment does not create a taxable event. Periodical
payment of lease instalments have reference to the point of time when tax
is to be collected, which need not be in sync with the taxable event. At
best, it can be treated as having reference to measure of tax, but not the
subject matter of tax. Reliance is placed upon the decision of the Supreme
Court in M/s 20th Century Finance Corporation Limited and Another
versus State of Maharashtra, (2000) 119 STC 182, Union of India and
Others versus Bombay Tyre International Limited, (1984) 1 SCR 347 and
decision of the Karnataka High Court in STRP No.356/2012 and STRP
Nos. 544-620/2013, State of Karnataka versus M/s Lease Plan India
Limited, decided on 6th August, 2014. It is submitted that the decision of
the Division Bench of the Delhi High Court in M/s Infrastructure Leasing
and Financial Services Limited versus Commissioner of Value Added
Tax and Others, (2010) 29 VST 346 (Delhi) is distinguishable in view of
the difference in language of Section 3 of the Act of 2002, i.e., Delhi Sales
Tax Act on Right to Use Goods Act, 2002 and Section 105(1)(b) of the
Act, i.e., Delhi Value Added Tax Act, 2004.
9. In order to appreciate the controversy, we would like to reproduce
Sections 105 and 106 of the Act and the same read:-
"105 Application to sales and purchases
(1) The tax imposed by section 3 of this Act applies to every -
(a) sale, including an instalment sale and hire purchase of
goods, made on and after 1st April, 2005;
(b) sale in the form of the transfer of a right to use goods, to the
extent that the right to use goods is exercised after 1st April,
2005.
(2) Tax credits arising under section 9 of this Act shall be
allowed only for -
(a) a purchase, including a purchase under an instalment sale
and hire purchase of goods, made on and after 1st April, 2005;
and
(b) a purchase occurring in the form of the acquisition of a
right to use goods, to the extent that the right to use goods is
exercised after 1st April 2005.
Explanation.- This provision does not prevent the person
claiming the special tax credit allowed under section 14 of this
Act.
(3) Where an amount is paid or received prior to 1st April,
2005 in respect of a sale or purchase occurring after 1st April,
2005, and the person calculates his turnover or turnover of
purchases based on amounts paid and received, the amount
shall be treated as forming part of the person‟s turnover or
turnover of purchases in the tax period in which the sale
occurs.
(4) Where a dealer registered under the repealed Delhi Sales
Tax on Works Contract Act, 1999 (Delhi Act 9 of 1999)
(hereinafter referred to in this sub-section as "the repealed
Act"), is liable to pay tax under this Act, and has at any time
prior to the 1st day of April, 2005 entered into any works
contract, where the total contract value was inclusive of the tax
payable under the repealed Act, and the execution of the said
work contract has continued after the 1st day of April, 2005,
then the liability of the dealer to pay tax under this Act shall be
discharged at the rates applicable under this Act, and the
liability so discharged in respect of the said contract shall not
exceed the liability which would have accrued under the
repealed Act if it had continued to be in force and in the case of
a dealer who had opted for composition of tax under the
repealed Act, the liability under this Act in respect of a contract
where the execution has started before the 1st day of April,
2005 and has continued thereafter shall not exceed the sum
which would have been payable by way of composition in
respect of the said contract under the repealed Act if it had
continued to be in force:
PROVIDED that the provisions of this sub-section shall be
valid up to the 31st day of March, 2007:
PROVIDED FURTHER that the provisions of this sub-section
shall not apply where the contract value has been changed on
account of increased liability under this Act:
PROVIDED ALSO that the provisions of this sub-section shall
apply only if there was no provision in the contract for revising
the value of the contract on account of the change of tax
liability.]
106 Repeal and savings
(1) The Delhi Sales Tax Act, 1975 (Act 43 of 1975), the Delhi
Tax on Entry of Motor Vehicles into Local Areas Act, 1994
(Delhi Act 4 of 1995), the Delhi Sales Tax on Works Contract
Act, 1999 (Delhi Act 9 of 1999), and the 1[Delhi Sales Tax on
Right to Use Goods Act, 2002 (Delhi Act 13 of 2002)] as in
force in Delhi (referred to in this section as the "said Acts"),
are hereby repealed.
(2) Notwithstanding sub-section (1) of this section, such repeal
shall not affect the previous operation of the said Acts or any
right, title, entitlement, obligation or liability already acquired,
accrued or incurred thereunder.
(3) For the purposes of sub-section (2) of this section, anything
done or any action taken including any appointment,
notification, notice, order, rule, form or certificate in the
exercise of any powers conferred by or under the said Acts
shall be deemed to have been done or taken in the exercise of
the powers conferred by or under this Act, as if this Act were in
force on the date on which such thing was done or action was
taken, and all arrears of tax and other amounts due at the
commencement of this Act may be recovered as if they had
accrued under this Act.
(4) Notwithstanding anything contained in this Act, for the
purpose of the levy, assessment, deemed assessment,
reassessment, appeal, revision, review, rectification, reference,
registration, collection, refund or input or credit of input tax of
allowing benefit of exemption or deferment of tax, imposition
of any penalty or of interest or forfeiture of any sum, which
relates to any period ending before 1st day of April, 2005 or for
any other purpose whatsoever connected with or incidental to
any of the purposes aforesaid, and whether or not the tax,
penalty, interest or sum forfeited, if any, in relation to such
proceedings, is paid before, on or after 1st day of April, 2005,
the repealed Act and all rules, regulations, orders, notifications,
forms and notices issued thereunder and in force immediately
before 1st day of April, 2005 shall continue to have effect as if
this Act has not been passed."
10. Section 106 is a repeal and a savings clause. As already noticed
above, the Act repeals four earlier enactments by a single consolidated Act.
Sub-section (2) to Section 106 protects any right, title, entitlement,
obligation or liability already accrued, acquired or incurred under the Act
of 2002 and states that it shall not affect previous operation of the said Act.
Sub-section (3) expands the scope and clarifies sub-section (2) but in
respect of anything done or any action taken in exercise of powers by or
under the four repealed enactments, as if these were done or taken in
exercise of powers conferred by or under the Act, i.e., Delhi Value Added
Tax Act, 2004. It specifically records that arrears of tax and other amounts
due under four repealed enactments at the commencement of the Act, may
be recovered under the Act. Sub-section (4) was inserted in 2012 but with
retrospective effect from 1st April, 2005 and relates to actions, etc.
regarding levy, assessment, re-assessment, appeal revision, review, etc.
11. Section 105 in clause (a) stipulates that Section 3 would apply to
every sale, including instalment sale or hire-purchase of goods made on or
after 1st April, 2005. Sub-clause (b) is the material clause and requires
elucidation, as it specifically pertains to transfer of right to use goods. Sale
in the form of transfer of right to use goods, would be subjected to tax
under Section 3 of the Act to the extent that right to use goods is exercised
after 1st day of April, 2005. If we carefully read clause (b) to sub-section
(1) to Section 105 of the Act, it can be bifurcated into two parts. The first
part of the said clause relates to the subject matter of tax, i.e. the taxable
event and the second part of the said clause relates to the manner/mode of
collection or the time. Only when and to the extent that the right to use
goods is exercised after 1st April, 2005, it would be taxable under Section 3
of the Act, i.e., Delhi Value Added Tax Act, 2004 in terms of clause (b) to
Section 105 of the Act. To the extent the right to use goods was exercised
before 31st March, 2005, Section 3 of the Act would not be applicable.
Perceptibly, the extent of right to use goods exercised before 1 st April,
2005 would be covered by the Act of 2002. The second part does not make
reference to the taxable event, i.e. the sale in the form of transfer of right to
use goods. The second part relates to the extent to which the right to use
goods is exercised after 1st April, 2005 The first part relates to the taxable
event or the subject matter of tax and is general and relates to sale in form
of transfer of right to use goods, which may be before or after 1st April,
2005. Thus, what would be included and subjected to tax under Section 3
of the Act under clause (b) to Section 105, would be the extent to which the
right to use goods is exercised after 1st April, 2005.
12. The aforesaid interpretation becomes clear and finds resonance in
sub-section (2), which deals with tax credit under Section 9 of the Act.
Under clause (a) to sub-section (2) to Section 105 of the Act, tax credit is
to be allowed on purchases, including purchase on instalment or hire-
purchase made on or after 1st April, 2005, which is in consonance with
clause (a) to sub-section (1) to Section 105 of the Act. Clause (b) to sub-
section (2) to Section 105 entitles the hirer to take tax credit in respect of
purchase occurring in form of acquisition of a right to use goods and to the
extent that the right to use goods is exercised. If the said right to use goods
is exercised after 1st day of April, 2005, tax credit would be available to the
hirer. Thus, the benefit of tax credit would be available to the hirer to the
extent right to use goods is exercised after 1st April, 2005.
13. The reason in enacting clause (a) and (b) to sub-sections (1) and (2)
to Section 105 of the Act has a purpose and object. Clause (a) to Section
105(1) refers to sales made on or after 1st April, 2005. The term „sale‟ is
defined in sub-section (zc) to Section 2 in a comprehensive manner and
includes in clause (vi), transfer of right to use in goods for any purpose,
whether or not for specified period, for cash, deferred payment or valuable
consideration. The necessary sequitur is that transfer of right to use goods
on or after 1st April, 2005 would be sale and covered by clause (a) to sub-
section (1) to Section 105 of the Act. Clause (b) to Section 105(1) of the
Act was not enacted for bringing within the ambit of Section 3, sales
including sales in the nature of transfer of right to use goods made on or
after 1st April, 2005, but to include in the ambit of Section 3 of the Act
even sales in the form of transfer of right to use goods made prior to 1st
April, 2005, to the extent that the right to use goods is exercised on or after
1st April, 2005. The expression "to the extent that the right to use goods is
exercised" would necessarily refer to and can only refer to instalments or
lease rentals paid on or after 1st April, 2005. This would be the natural and
judicious interpretation of the said clause. The hirer exercises his right to
use goods by making payment of the lease rental. The aforesaid
interpretation is lucid and clear from clause (a), which refers to sale
including instalment sale or hire-purchase of goods made on or after 1st
April, 2005. In such cases, sub-section (3) to Section 105 would be
applicable, when the conditions stated therein are satisfied.
14. We have also examined and read Section 106 and do not find that
the said Section in any way compels us or mandates a different
interpretation. Sub-section (3) to Section 106 makes the provisions of the
Act, i.e., Delhi Value Added Tax Act, 2004, applicable as if it was in force
when the action was taken under the repealed enactments.
15. The aforesaid view taken by us in fact finds support from the
decision relied by the appellant in the case of Bombay Tyre International
Limited (supra). In the said decision, the Supreme Court drew an apparent
distinction between subject matter of tax or the taxable event, which in the
case of excise law is production or manufacture of goods, and the stage of
collection. It was observed that the stage of collection need not be
integrated with the completion of manufacturing process. In other words,
the date of collection, need not synchronise with the taxable event which in
the present case is the transfer of right to use goods. In other words, the
date or time of payment may be different and subsequent to the taxable
event, i.e., the date on which transfer of right to use goods is made. In
Bombay Tyre International Limited (supra), the Supreme Court held that
levy of tax in our country has a status of constitutional concept, but the
point of collection, i.e., time of collection would depend upon the statute.
The statute could, therefore, declare the point at which the tax is to be
collected, which need not synchronise with the taxable event and can be
different in point of time. The said judgment also elucidates the difference
between the taxable event/subject matter of tax and the standard by which
the amount of tax is measured. Measure of tax should throw light on the
general character of tax, but is not the true test of the nature of tax or
necessarily determinative. Thus, duty on excise is chargeable on
manufacture or production of goods, but measure of tax or the method by
which the tax is calculated should not be identified with the nature of tax.
Thus, the contention that the measure of tax cannot include manufacturing
profits was rejected.
16. The view we have taken is not contrary to the decision of the
Supreme Court in 20th Century Finance Corporation Limited & Another
(supra). The Constitution Bench in the said case resolved the controversy
relating to situs or power of a State to tax transfer of right to use on the
premise that the goods put to use were located within the said State. The
controversy had arisen in a group of cases in view of the limitations placed
upon the taxing power of the State by virtue of Article 286 of the
Constitution of India, which imposes restriction on imposition of tax on
sale or purchase of goods where sale or purchase of goods takes place; (a)
outside the State; or, (b) in the course of import of goods into or export of
goods out of India. Clause (2) of Article 286 stipulates that the Parliament
may, by law, formulate principles for determining when a sale or purchase
of goods takes place in such ways. The Supreme Court referred to the
legislative history of Article 286, including removal/omission of the
Explanation. The decision of the Supreme Court in Bengal Immunity
Company Limited versus State of Bihar and Others, (1955) 2 SCR 603
that situs of sale or purchase is wholly irrelevant as regards its inter-State
character, was relied. Reference in this regard was made to the amendment
made by the Constitution (Sixth Amendment) Act, 1956 by which Entry
92A was added to List I of the VII Schedule and also addition of sub-
clause (g) to clause (1) and sub-clause (3) to Article 269 of the
Constitution. By these amendments, the Parliament was empowered to
levy and collect tax on sale or purchase of goods where said sale or
purchase takes place in the course of inter-State trade or commerce and
also to lay down principles for determining when sale or purchase of goods
takes place in the course of inter-State trade or commerce. It is in the said
context and for determining whether or not the State Legislature had the
necessary power and authority to tax transfer of right to use goods under
clause 29A(d) of Article 366 of the Constitution, observations were made
and the ratio was expounded. It was clearly held that in spite of enactment
of clause 29A(d) to Article 366, the limitation on the power of the State
Legislature to levy sales tax or deemed sales under other Articles continues
and is valid. Sub-clauses (a) to (f) of clause 29A to Article 366 were not
actually „sales‟ strictly within the meaning of term „sale‟, but are deemed
as „sales‟ by legal fiction, but the situs of said sales for the purpose of
taxation by a particular State must not violate Articles 286 and 269 of the
Constitution. For the purpose of deciding whether a State Legislature has
power to tax transfer of right to use goods, the following observations were
made:-
"25. Article 286 is in Part XII of the Constitution which deals
with "Finance, Property, Contracts and Suits". It is one of the
several articles which are grouped under the heading
"Miscellaneous Financial Provisions" in Chapter I of that Part.
It is to be noted that it has not found a place in Part XI, Chapter
I whereof deals with "Legislative Relations" including
"Distribution of Legislative Powers" between Parliament and
the legislatures of States. The marginal note to Article 286 is
"Restrictions as to imposition of tax on the sale or purchase of
goods", which, unlike the marginal notes in Acts of the British
Parliament, is part of the Constitution as passed by the
Constituent Assembly, prima facie, furnishes some clue as to
the meaning and purpose of the article. Apart from the
marginal note, the very language of that article makes it
abundantly clear that its object is to place restrictions on the
legislative power of the States with respect to the imposition of
taxes on the sales or purchases of goods. It will be recalled that
Section 100(3) of the Government of India Act, 1935 read with
Entry 48 of List II of the Seventh Schedule to that Act gave
power to the Provincial Legislatures to make laws with respect
to "taxes on sale of goods and on advertisements". Pursuant to
the legislative power thus conferred on them the Provincial
Legislatures enacted Sales Tax Acts for their respective
Provinces. Although in most of those Acts "sale" was first
defined as meaning transfer of the property in the goods, so as
to make the passing of the property within the Province the
principal basis for the imposition of the tax, yet by means of
Explanations to that definition, those Acts gave extended
meanings to that word and thereby enlarged the scope of their
operation. The imposition of tax on the sales or purchases of
goods on the basis of a very slight territorial connection or
nexus resulted in what has been graphically described by
Patanjali Sastri, C.J. in the passage quoted above from the
majority judgment in the Bombay appeal. This imposition of
multiple taxes on one and the same transaction of sale or
purchase was certainly calculated to hamper and discourage
free flow of trade within India regarded as one economic unit.
This undesirable state of affairs had to be put right. Therefore,
while the Constitution-makers by Article 246(3) read with
Entry 54 in List II of the Seventh Schedule to the Constitution
conferred power on the legislatures of Part A and Part B States
to make law with respect to "Taxes on the sale or purchase of
goods other than newspapers" they at the same time by Article
286 clamped on that legislative power several fetters. Broadly
speaking, the fetters thus placed on the taxing power of the
States are that no law of a State shall impose or authorise the
imposition of a tax on the sale or purchase of goods where such
sale or purchase takes place, (a) outside the State or (b) in the
course of import or export or (c) except insofar as Parliament
otherwise provides, in the course of inter-State trade or
commerce and lastly (d) that no law made by the Legislature of
a State imposing or authorising the imposition of a tax on the
sale or purchase of any such goods as have been declared by
Parliament by law to be essential for the life of the community
shall have effect unless it has been reserved for the
consideration of the President and has received his assent. It
should be noted that these are four separate and independent
restrictions placed upon the legislative competency of the
States to make a law with respect to matters enumerated in
Entry 54 of List II. In order to make the ban effective and to
leave no loophole the Constitution-makers have considered the
different aspects of sales or purchases of goods and placed
checks on the legislative power of the States at different angles.
Thus in clause (1)(a) of Article 286 the question of the situs of
a sale or purchase engaged their attention and they forged a
fetter on the basis of such situs to cure the mischief of multiple
taxation by the States on the basis of the nexus theory. In
clause (1)(b) they considered sales or purchases from the point
of view of our foreign trade and placed a ban on the States'
taxing power in order to make our foreign trade free from any
interference by the States by way of a tax impost. In clause (2)
they looked at sales or purchases in their inter-State character
and imposed another ban in the interest of the freedom of
internal trade. Finally, in clause (3) the Constitution-makers'
attention was rivetted on the character and quality of the goods
themselves and they placed a fourth restriction on the States'
power of imposing tax on sales or purchases of goods declared
to be essential for the life of the community. These several
bans may overlap in some cases but in their respective scope
and operation they are separate and independent. They deal
with different phases of a sale or purchase but, nevertheless,
they are distinct and one has nothing to do with and is not
dependent on the other or others. The States' legislative power
with respect to a sale or purchase may be hit by one or more of
these bans. Thus, take the case of a sale of goods declared by
Parliament as essential by a seller in West Bengal to a
purchaser in Bihar in which goods are actually delivered as a
direct result of such sale for consumption in the State of Bihar.
A law made by West Bengal without the assent of the President
taxing this sale will be unconstitutional because (1) it will
offend Article 286(1)(a) as the sale has taken place outside the
territory by virtue of the Explanation to clause (1)(a), (2) it will
also offend Article 286(2) as the sale has taken place in the
course of inter-State trade or commerce and (3) such law will
also be contrary to Article 286(3) as the goods are essential
commodities and the President's assent to the law was not
obtained as required by clause (3) of Article 286. This appears
to us to be the general scheme of that article.
26. We come now to the particular bans. Although the
legislatures of the States were empowered by Article 246(3)
read with Entry 54 of List II to make a law with respect to
taxes on sales or purchases of goods, the different State
Legislatures, as already mentioned, considered themselves free
to make a law imposing tax on sales or purchases of goods
provided they had some territorial nexus with such sales or
purchases e.g. that one or other of the ingredients or events
which go to make up a sale or purchase was found to exist or
had happened within their respective territories. Whether they
were right or wrong in so acting is a question which has not
been finally decided by the courts but the fact is that they did
so. This resulted in multiple taxation which manifestly
prejudiced the interests of the ultimate consumers and also
hampered the free flow of inter-State trade or commerce. So
the Constitution-makers had to cure that mischief. The first
thing that they did was to take away the States' taxing power
with respect to sales or purchases which took place outside
their respective territories. This they did by clause (1)(a). If the
matter had been left there, the solution would have been
imperfect, for then the question as to which sale or purchase
takes place outside a State would yet have remained open. So
the Constitution-makers had to explain what an outside sale
was and, this they did by the Explanation set forth in clause (1).
The language employed in framing the Explanation, however,
has given scope for argument to counsel and presented
considerable difficulties to the court in ascertaining its purpose
and intendment. If the Explanation simply said "For the
purposes of sub-clause (a), a sale or purchase shall be deemed
to have taken place outside a State when the goods have
actually been delivered for the purpose of consumption in
another State, notwithstanding the fact; etc. etc." then none of
the difficulties would have arisen at all. But why, it is asked,
did the Constitution-makers seek to explain what was an
outside sale or purchase by saying that a sale or purchase was
to be deemed to take place inside the particular State
mentioned in the Explanation? Was the purpose of the
Explanation only to explain what was an outside sale or
purchase or was it also its purpose to allot or assign a particular
class of sales or purchases of the kind mentioned therein to a
particular State so as to put the question of situs of the sales or
purchases of that description beyond the pale of controversy?
These are questions which arise and are raised because of the
somewhat involved language of the Explanation. Four different
views as to the true meaning and effect of the Explanation have
been suggested for our consideration and arguments have been
advanced for and against the correctness of each of them. In the
view we have taken, it is not necessary for us to express any
final opinion in the matter. We propose accordingly to note the
possible views and record very briefly the criticisms relating to
each of those views and the suggested answers to such
criticisms.
27. One view which has been called the strict view is this. In
clause (1)(a) the Constitution-makers have placed a ban on the
taxing power of the States with respect to sales or purchases
which take place outside the State. If the matter had been left
there the ban would have been imperfect, for the argument
would have still remained as to where a particular sale or
purchase took place. Does a sale or purchase take place at the
place where the contract of sale is made, or where the property
in the goods passes or where the goods are delivered? These
questions are answered by the Explanation. That Explanation is
"for the purposes of sub-clause (a)" i.e. for the purpose of
explaining which sale or purchase is to be regarded as having
taken place outside a State. By saying that a particular sale or
purchase is to be deemed to take place in a particular State the
Explanation only indicates that such sale or purchase has taken
place outside all other States. The Explanation is neither an
exception nor a proviso but only explains what is an outside
sale referred to in sub-clause (a). This if does by creating a
fiction. That fiction is only for the purposes of sub-clause (a)
and cannot be extended to any other purpose. It should be
limited to its avowed purpose. To say that this Explanation
confers legislative power on what for the sake of brevity has
been called the delivery State is to use it for a collateral
purpose which is not permissible. Further, it is utterly illogical
and untenable to say that Article 286 which was introduced in
the Constitution to place restrictions on the legislative powers
of the States, by a side wind, as it were, gave enlarged
legislative powers to the State of delivery by an explanation
sandwiched between two restrictions. This construction runs
counter to the entire scheme of the article and the Explanation
and one may see no justification for imputing such indirect and
oblique purpose to this article. Had the Constitution-makers so
desired they could have done so in a more direct and
straightforward way. To hold that the Explanation has, besides
its declared purpose, another hidden purpose of conferring or
enlarging legislative power is to build up a fanciful argument
merely on the unfelicitous and involved language used in the
Explanation although it is distinctly not the purpose of the
Explanation and although it does not purport substantively
and proprio vigore, to confer any legislative power on any
State. Its only purpose is to explain what an outside sale is, so
that, by one stroke, as it were, it takes away the taxing power,
in respect of sales or purchases of the kind referred to in the
Explanation, of all States other than the State where such sales
or purchases are, by the Explanation, to be deemed to have
taken place. This view of the Explanation was taken in the
dissenting judgment in the case of the State of Travancore-
Cochin v. Shanmugha Vilas Cashew Nut Factory [ (1945) 5
SCR 53] . The view that the Explanation is only for the
purposes of sub-clause (a) of clause (1) and cannot be carried
over to clause (2) was also taken in the dissenting judgment in
the State of Bombay v. The United Motors (India) Ltd. [ (1953)
4 SCR 1069 at p. 1077] at p. 1103."
17. The aforesaid observations and ratio are with reference to the
question, which had arisen and are not wholly relevant and applicable for
the issue in question. They do not relate to power and authority of taxation
under the Act. They relate to the right of a State to tax, without violating
and breaching the limitation and restriction not to tax the inter-State sales.
It is in this context it has been held that the levy of tax is not on use of
goods, but on transfer of right to use goods. Right to use goods is the
resultant effect of transfer of right to use goods and in the context of sub-
clause (d) to clause 29A of Article 366 for the purpose of deciding which
State and whether a particular State has the right to tax the said transfer,
observations have been made. The aforesaid legal position becomes clear
from the decision of the Supreme Court in the case of Bharat Sanchar
Nigam Limited and Another versus Union of India and Others, (2006)
145 STC 91 (SC).
18. In Bharat Sanchar Nigam Ltd. & Ors. versus Union of India &
Anr. (supra), reference was made to the earlier judgment in the case of 20th
Century Finance Corpn. Ltd. (supra) and it was explained that the object
and purpose of clause 29A to Article 366 is to bring specific transactions,
where one or more essential ingredients of sale as defined in the Sales of
Goods Act are absent, within the ambit of purchase and sales for purpose
of levy of sales tax. Yet, there are certain limitations on levy of tax by the
State Governments under Entry 54 of List II of the VII Schedule of the
Constitution, which have not been overridden. Decision in 20th Century
Finance Corporation Ltd. (supra) cannot be interpreted as an authority for
the proposition that delivery of possession of goods is not a necessary
concomitant for complete transaction of sale under sub-clause (d) to Article
366(29A) and in order to decide whether particular State is entitled to levy
tax, the court has to determine when and where the taxable event for the
purpose of sale takes place. A.R. Lakshmanan, J. in his concurrent
judgment has affirmatively stated that decision in 20th Century Finance
Corporation Ltd. (supra) related only to situs for the purpose of the State
which could impose the tax and not subject matter of taxation which is a
transfer of right to use goods. The said observations are material and
relevant.
19. At this stage, we would like to refer to the decision of Delhi High
Court in Infrastructure Leasing and Financial Service Ltd. vs.
Commissioner of Value Added Tax & Ors. (2010) 29 VST 349 (Del). The
said case related to Act of 2002 and the issue was whether lease rentals
received after 15th September, 2004 would be taxable though the
agreements for transfer of right to use were prior to the said date. The Act
of 2002 was enforced/notified with effect from 15th September, 2004 only.
The challenge raised in the said writ petition was on the ground that the
definition of term „turnover of sales‟ in Section 2(s) was ultra vires the
charging section, i.e. Section 3 which postulated and codified the instance
of tax. The High Court applied the principle of harmonious construction
and reconciled the two sections. It was further observed that principle of
ultra vires would not be applicable when challenge made is that one
provision of the Act is ultra vires of another. Thus, constitutional validity
of Section 3, or for that matter Section 2(n) of Act, 2002, was not
challenged and even the doctrine of reading down was not relied. The
High Court observed that in terms of the two provisions, lease instalments
paid after 15th September, 2004 would be subject to tax even when the
agreements were prior in point of time. The term „sale‟ as defined in
Section 2(n) of Act 2000, it was distinguished, would include deferred
payment, i.e. when payment is staggered and not at one time. In such
cases, right to use accrues in favour of the lessee when he pays rental
regularly and in terms of the agreement. In this context, reference was also
made to clause 29A inserted to Article 366 which treats certain transactions
as sale by deeming effect. Thus, the said decisions support and affirm our
reasoning.
20. In view of the aforesaid discussion relating to interpretation of
Sections 105 and 106 of the Act, we do not see any reason to interfere with
the impugned decision on the said aspect. Noticeably, Section 3 of the Act
which is a charging section imposes tax on every dealer in respect of every
sale of goods. The term „sale‟ as defined in Section 2(1)(zc) clause (vi)
would include transfer of right to use goods. Section 2(1)(zm) defines
„turnover‟ to be aggregate of the „sale price‟ which as per clause (zd)(iii) to
Section 2(1) means valuable consideration or hire purchase amount
received or receivable for such transfer irrespective of whether or not the
rights to use goods is for specified period. Rule 4 of the DVAT Rules,
2004, in clause (b) stipulates that in case of transfer of right to use goods,
not being hire purchase agreement or instalment sale agreement, is the
proportion or sale price, i.e. lease rental due and payable during the
relevant tax period.
21. We do not find any merit in STA Nos.47 and 49/2014. Accordingly,
the substantial question of law framed in the said appeals is answered in
against the appellant and in favour of the respondent Revenue.
22. However, the position in STA No. 50/2014 would be different. The
said appeal relates to imposition of penalty under Section 86(10) of the
Act. The finding given by the Tribunal reducing the penalty to 20% reads
as under:-
"11. Regarding penalty there is substance in the submissions
by the Ld. Counsel for the appellant that on account of
different interpretation of law as was also sought of by the
appellant by filing determination application it cannot be said
that the return was false, misleading or deceptive in material
particulars as there was sufficient reason for filing the return at
rate of 4% as per provisions of the DST on Right to Use Goods
Act, 2002 which was default assessed at the rate of 12.5%
which fact created tax deficiency. Considering the submissions,
this Tribunal is of the considered view that second proviso to
clause 2 of Sec. 86 of the DVAT Act applies to the appellant in
term of submission that tax properly payable was not
determined by the authorities including by this Tribunal as the
determination was pending for adjudication in appeal against
the orders passed by the Ld. Commissioner. Accordingly,
considering that there existed reasonable cause for filing such a
return which turn out to be a false, deceptive and misleading
return, the penalties is remitted to the 20% only of the amount
of penalty in each period which amount has been paid in
compliance of the stay orders passed by this Tribunal."
23. The aforesaid finding clearly shows that the Tribunal was of the
view that there existed a reasonable cause for filing of the returns as such
and declaring tax @ 4%, and the returns computing tax @ 4%, i.e. tax rate
prescribed in the Act of 2002, and not @ 12.5% were not false, deceptive,
or misleading.
24. Thus, there is merit in the contention of the appellant that there is
inherent contradiction in the order passed by the Tribunal. There is also
merit in this appeal as a Division Bench of the Delhi High Court in
Jatinder Mittal Engineers and Contractors versus Commissioner of
Trade & Tax (2011) 46 VST 498 (Delhi) has interpreted Section 86(10)
and held that the penalty can only be imposed under the said provision
when it is established that the return filed by the assessee is false,
misleading or deceptive in material particulars or the assessee omits from a
return any matter or thing without which return is false, misleading or
deceptive in a material particular. The High Court drew a distinction
between penalty under sub-section (10) to Section 86 and sub-section (12)
to Section 86; the latter is compensatory in nature and deals with tax
deficiency.
25. It is noticeable that in the present case, the notice for default
assessment had set up on entirely different case. Revenue had asserted that
the agreements between the appellant and third parties was in fact sale by
way of instalments and not transfer by way of right to use. Additional
Commissioner accepted the objections filed by the assessee on the said
aspect after acknowledging, incongruous assertions and ambiguities in the
contention raised by the Revenue, which were also inconsistent. It was
held that transactions were not hire purchase contracts and were not
purchase of chattels by way of instalments. However, an order of remit
was passed with the direction to the assessment authorities to re-examine
the matter after scrutiny of documents. At the same time, it was observed
that on the issue of applicability of rate of tax on the rental received as per
the agreement, assessing authority was right in taxing them @ 12.5 and not
at @4%.
26. In view of the aforesaid position, the substantial question of law
framed above in STA No.50/2014 is answered in favour of the appellant
and against the respondent Revenue holding that the Tribunal was not right
in directing levy of penalty @ 20% under Section 86(10) of the Act, after
recording the finding that the appellant assessee had a reasonable cause.
No finding has been recorded that the assessed had furnished returns which
were false, misleading or deceptive in material particulars.
27. The appeal Nos.47/2014 and 49/2014 are accordingly dismissed, and
appeal No.50/2014 are allowed. No costs.
(SANJIV KHANNA)
JUDGE
(V. KAMESWAR RAO)
JUDGE
FEBRUARY 5th, 2015
VKR/kkb
