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CASE NO.: Appeal (civil)  1660 of 2008

PETITIONER: M/s. Goa Carbon Ltd

RESPONDENT: Commissioner of Trade Tax

DATE OF JUDGMENT: 28/02/2008

BENCH: S.H. Kapadia & B. Sudershan Reddy

JUDGMENT: J U D G M E N T

CIVIL APPEAL NO.    1660 OF 2008 (Arising out of S.L.P. (C) No. 2566 OF 2007)

KAPADIA, J.

Leave granted. 2.      This civil appeal filed by the assessee is directed against  the judgment and order dated 19.10.06 passed by the High  Court of Judicature at Allahabad in three Trade Tax Revision  Nos.691, 692 and 693 of 2006 by which it has been held that  the transaction of transfer of the right to use was a local sale  under Section 3F of the U.P. Trade Tax Act, 1948 (for short,  "1948 Act").   

3.      Assessee is a company incorporated under Companies  Act, 1956 having its registered office at Panjim, Goa.  It is  engaged in the business of leasing and financing plants and  machinery.

4.      In this civil appeal we are concerned with the assessment  years 1994-95, 1995-1996 and 1996-97.

5.      While examining the case for the assessment years in  question pertaining to M/s. Kesar Enterprises Limited Baheri,  U.P., the Department noticed that the assessee herein  supplied plants and machinery to M/s. Kesar Enterprises  Limited on lease and that the assessee was in receipt of lease  rent for the machinery supplied by it to M/s. Kesar  Enterprises Limited Baheri, U.P.  Therefore, the Assessing  Authority issued notices under Section 3F of the 1948 Act to  show cause as to why tax should not be levied on the lease  rent received by the assessee herein.  None appeared on behalf  of the assessee and, therefore, A.O. passed ex-parte  assessment orders dated 31.3.98 and 27.3.99 imposing tax on  the lease rent received by the assessee.  The said assessment  orders were confirmed by the Deputy Commissioner (A). 6.      Aggrieved by the orders passed by the Deputy  Commissioner (A), the assessee preferred second appeal under  Section 10 of the 1948 Act before the Tribunal, Bareilly.  Vide  order dated 28.1.04 the Tax Tribunal remanded the cases to  the A.O. for fresh disposal.  The Tribunal directed the A.O. to  consider the cases de novo in the light of the judgment of this  Court in the case of 20th Century Finance Corpn. Ltd. and  Anr. v. State of Maharashtra \026 (2000) 6 SCC 12.

7.      On remand, the A.O. held that in the lease agreement  dated 24.3.92 there was a warranty clause which indicated

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that M/s. Kesar Enterprises Limited had selected the  equipments which were leased out to it prior to its purchase  by the assessee.  A.O. came to the conclusion that the  equipment was purchased prior to the execution of the lease  dated 24.3.92.  According to A.O., in view of the said clause in  the said lease the assessee was called upon to produce the  agreement/arrangement either oral or written pursuant to  which the equipment stood purchased by the assessee.   According to A.O., despite opportunity the assessee failed to  produce such agreement/arrangement.  Further, the A.O. also  relied upon an invoice dated 26.2.92 under which the assessee  had purchased boilers and turbines from Punjab Chemicals  and Pharmaceuticals Ltd., Dist. Patiala, Punjab, in which  there was reference to the Purchase Order dated 28.11.91  which indicated that the equipment was purchased under an  agreement/arrangement prior to lease agreement dated  24.3.92 which lease has shown to have been executed at  Mumbai as an afterthought and in order to earmark the  transaction as an outside sale.  This finding of the A.O. was  confirmed once again by the Deputy Commissioner (A).  It was  held that since the equipment was purchased on 26.2.92 (as  indicated by the invoice at page No.36 of the S.L.P. Paper  Book), the movement of the said equipment cannot be said to  have taken place from ex-U.P. place to Baheri in U.P. in  pursuance of the lease dated 24.3.92.  It was further held that  the Letter of Intent dated 29.10.91 was not a part of the lease.   Consequently, the appeal filed by the assessee stood  dismissed.  The concurrent findings, above-mentioned, were  affirmed by the Tribunal vide its order dated 6.5.06.  The  Tribunal further held that there was no merit in the argument  of the assessee that lease agreement was executed pursuant to  Letter of Intent dated 29.10.91, particularly, when there was  no indication to that effect in the lease.  According to the  Tribunal, had the lease been executed in continuation of the  Letter of Intent, there would have been reference to such letter  in the lease and in the absence of such reference it cannot be  said that the lease stood executed pursuant to the Letter of  Intent.  Consequently, the appeal filed by the assessee before  the Tribunal stood dismissed.  The Tax Revisions, filed by the  assessee before the High Court, have also been dismissed,  hence this civil appeal.

8.      In the case of 20th Century Finance Corpn. Ltd. (supra)  the Constitution Bench of this Court by majority held that  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.   That, 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 [See: para 25].  It has been further held that  Article 366(29-A)(d) shows that levy of tax is not on use of  goods but on the transfer of the right to use goods.  That, right  to use arises only on the transfer of such a right under the  contract and unless there is transfer of such 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 [See: para  27].

9.      On reading the above judgment it is clear that, in cases  falling under Section 3F of the 1948 Act, the subject-matter of

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taxation is transfer of right to use goods and, therefore, it is  unnecessary to deal with the question of delivery of possession  which is related to situs.  Therefore, in this case the place  where the right to use is transferred is relevant and not place  of delivery which may be relevant in case of oral contracts to  determine the situs.  In cases under Section 3F, the subject- matter of taxation is transfer of right to use and, therefore,  place where such right is transferred assumes importance.   Hence, we are required to look to the place at which the  contract is executed.  In case of oral contracts with which we  are not concerned the situs of the transfer may be where goods  are delivered.   

10.     According to assessee, the Letter of Intent was the  contract which existed on 29.10.91.  However, the said Letter  does not indicate the place, namely, Mumbai.  It is important  to note that this Letter of Intent was produced for the first time  after 12 years by the assessee.  No explanation has been given  for not producing the said letter earlier, particularly, when the  Department had repeatedly called upon the assessee to  produce any agreement/arrangement prior to the lease and  pursuant to which the Purchase Orders dated 28.11.91 were  placed by the assessee with the Punjab Chemicals and  Pharmaceuticals Ltd.  Moreover, in the invoice dated 26.2.92,  M/s. Kesar Enterprises Limited Baheri is described as lessee.   On that date there was no lease.  The lease has been executed  only on 24.3.92.  Taking into account the aforesaid  circumstances, we are of the view that the Letter of Intent  produced after 12 years cannot be relied upon in support of  the assessee’s case that there was a prior  agreement/arrangement even before 24.3.92 pursuant to  which the equipment stood purchased.  From the above  circumstances it is clear that the Letter of Intent is executed  not for commercial purposes but to evade the tax and  consequently it cannot be said that the impugned transaction  was an outside sale.  In the case of 20th Century Finance  Corpn. Ltd. (supra), the assessee carried on business of  leasing of diverse equipment.  In that case, assessee had  entered into Master Lease Agreements with the lessee which  provided that orders for individual equipment will be placed at  the instance of the lessee by the appellants and that the  equipment to be leased will be despatched by the supplier to  the locations specified in the lease.  Therefore, in that case it  was established that the appellants had placed their purchase  orders to the suppliers pursuant to the Master Lease  Agreement whereas in the present case there is nothing to  indicate that there existed an agreement/arrangement  pursuant to which the Purchase Orders were placed on  28.11.91.  Therefore, on the facts of the present case, we hold  that the judgment of this Court in the case of 20th Century  Finance Corpn. Ltd. (supra) has no application to the present  case.  In fact, the record indicates that the Letter of Intent  surfaced after 12 years at the instance of the assessee in order  to align this case with the facts in the case of 20th Century  Finance Corpn. Ltd. (supra).

11.     For the aforestated reasons, we are in agreement with the  view expressed by the Tribunal that the entire arrangement  was got up in order to project the impugned transaction as an  outside sale so that the said transaction does not come within  the ambit of Section 3F of the 1948 Act.  The High Court has  given reasons with which we do not agree in entirety though  we agree with the operative part of its judgment dismissing the  appeal of the assessee.  12.     For the aforestated reasons, in the facts of the present

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case, we do not wish to interfere with the finding of fact  recorded by the Tribunal in the present case.  Accordingly, the  civil appeal is dismissed with no order as to costs.