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PETITIONER: 20TH CENTURY FINANCE CORPN.  LTD.  & ANR.

       Vs.

RESPONDENT: STATE OF MAHARASHTRA

DATE OF JUDGMENT:       09/05/2000

BENCH: S.P.Bharucha, V.N.Khare. D.P.Mohapatro

JUDGMENT:

     V.N.KHARE, J.

     (1)  Despite the decisions of this Court in  Builders Association  of  India  and others vs.  Union of  India  and others  (1989)  2 SCC 645 and M/s.  Gannon Dunkerley  &  Co. and  others vs.  State of Rajasthan and others (1993) 1  SCC 364,  the  controversy  as regards the power  of  the  State legislature  to  levy  sales tax under  clause  (29A)(d)  of Article  366  of  the  Constitution in the  context  of  the question where is the taxable event on the transfer of right to  use  any  goods remained unresolved.  In this  group  of cases,   we  are  concerned  with   the  power   of   States legislatures  to levy sales tax on the transfer of right  to use any goods envisaged under clause (29A)(d) of Article 366 of the Constitution on the premise that goods put to use are located  within  their  States.   Several  States  by  their legislations have levied tax on the transactions of transfer of  right to use goods on the location of goods at the  time of  their use within their States irrespective of the  place where  the  agreement for such transfer of the right to  use such goods is made.  The questions therefore, that arise for consideration  in these cases are, whether a State can  levy sales  tax  on transfer of right to use goods merely on  the basis that the goods put to use are located within its State irrespective  of  the  facts  that -  (a)  the  contract  of transfer  of  right  to use has been  executed  outside  the State;   (b)  sale  has  taken place in  the  course  of  an inter-State  trade;   and  (c) sales are in  the  course  of export  or  import  into  the   territory  of  India.    The appellants  case  is that, the State legislature cannot  so frame its law as to convert an outside sale or a sale in the course  of import or a sale in the course of an  inter-State trade  or  commerce into a sale inside the State.   (2)  The appellants  in civil appeals and the petitioners in the writ petitions  filed  under Article 32 of the  Constitution  and transferred  petition,  and respondent in Civil Appeal  Nos. 6218-  23/95  are  the   companies  incorporated  under  the Companies  Act,  and some have their registered offices  at places  outside the respondent States and others have inside the  States.   They  carry on business  of  leasing  diverse equipments.   According  to them, they entered  into  Master Lease Agreements with the lessee i.e.  the party who desired

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to  take equipment for use on hire.  The appellants and  the petitioners    agree    to    give    on    lease    diverse machinery/equipments  listed in the Lease Summary  Schedule, subject  to  terms and conditions stipulated in  the  Master Lease  Agreements.  The Lease Summary Schedule only mentions the  broad  category of equipment proposed to be leased  and the  correct  value  thereof.  The  Master  Lease  Agreement provides that orders for individual equipment will be placed by  the  appellants at the instance of lessees and that  the equipment   to  be  leased  will   be  dispatched   by   the manufacturer   or  supplier  concerned   to  the   locations specified  in the lease.  Thereafter, at the instance of the lessees,  the appellants place their purchase orders to  the suppliers or manufacturers for supply of individual items or equipments  falling  within the category and  correct  value mentioned  in  the  Master Lease Agreement  Schedules.   The appellants  and the petitioners further case is that, they disburse  the value of equipment to the suppliers and at the instance of the appellants and the petitioners the suppliers deliver  the  equipments  to the lessees  at  the  specified locations  for use.  After the equipments are delivered  and put   to  use,  the   lessee  executes  supplementary  lease schedules acknowledging due receipt of the lease equipments, and  such supplementary lease deeds form an integral part of the  Master Lease Agreement.  Such is the nature of business carried  on  by the appellants and the petitioners  in  this group  of  cases.   According  to  the  appellants  and  the petitioners,  one  transaction of transfer of right  to  use goods is subjected to sales tax by more than one States.  On such  a transaction, some States levy tax on the  appellants and  the petitioners, merely because the goods were found to be  located  in  their States at the time  of  execution  of contract  which  has  taken place outside the  State.   Some States levy tax when the goods are delivered in their States for  use  in  pursuance of agreements of  transfer  executed outside  their States and some States tax such  transactions of  deemed sales on the premise that agreements for transfer of right to use have been executed within their States.  The appellants  and the petitioners, therefore, have  challenged the  validity of the legislations by various States  whereby one  transaction of transfer of right to use goods has  been subjected to tax by more than one States.

     (3)  The petitioners by means of writ petitions  under Article  32  and  transferred petition have  challenged  the validity  of the provisions relating to imposition of tax on transfer  of  right to use goods contained in the sales  tax laws  of  States  of  Maharashtra,  Karnataka,  Tamil  Nadu, Haryana, Uttar Pradesh, Rajasthan and Andhra Pradesh.  Civil Appeal Nos.  6218-23/95 are directed against the judgment of the  Andhra  Pradesh High Court allowing the writ  petitions filed  by the respondents therein.  We will separately  deal with  the  sales tax laws of other States.  At  present,  we propose  to  consider  the controversies involved  in  these cases  with  reference  to the provisions contained  in  The Maharashtra  Sales  Tax on the Transfer of the Right to  Use Any Goods for any Purpose Act, 1985 (hereinafter referred to as  the Maharashtra Act).  The Maharashtra Act purports to levy and collect tax on the transfer of the right to use any goods  for any purpose in the State of Maharashtra.  Section 2(10)  of Maharashtra Act defines sale thus:  sale means the  transfer of the right to use any goods for any purpose (whether  or not for a specified period) for cash,  deferred payment  or  any other valuable consideration, and the  word sell  with  all  its grammatical  variations  and  cognate

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expressions,  shall  be construed accordingly.   The  above sub-section has an Explanation, which runs as under:  -

     Explanation.   - For the purposes of this clause, the transfer  of the right to use any such goods shall be deemed to have taken place in the State of Maharashtra if the goods are  in  the State of Maharashtra at the time of  their  use irrespective  of  the  place where the  agreement  for  such transfer of the right to use such goods is made, and whether the  assent  of  the party is prior or  subsequent  to  such transfer of the right to use any such goods.

     Section   3  of  the   Maharasthra  Act  provides  for incidence  of  tax  and Section 4 deals with  levy  of  tax. There  is  no dispute as regards the definition  of  sale. What  is  under challenge is the Explanation to  sub-section (10)  of  Section 2 of the Act, which fixes situs of  deemed sale within the State of Maharashtra on location of goods at the  time  of  their use.  The appellants in  Civil  Appeals excepting  Civil Appeal Nos.  6218-23/95, had challenged the levy  of sales tax by State of Maharashtra by means of  writ petitions  under Article 226 of the Constitution before  the Bombay  High Court.  Before the High Court, it was contended by  the  appellants that the Maharashtra  Act,  particularly Section  3 read with Section 2(10), purports to levy tax not only  the transfers of right to use goods which takes  place within  the State of Maharashtra, but also upon the transfer which occasions the movement of leased or to be leased goods from  one  State  to another, and also  upon  the  transfers effected  during movement of goods from one State to another and,  therefore, the Act is ultra vires Articles 269(3)  and 246 read with Entry 92A of List I of the Seventh Schedule of the  Constitution.   It  was  also contended  that  the  Act imposes  sales tax upon transfers of the right to use  goods which  takes place outside the State of Maharashtra and also in  the course of import of the goods into the territory  of India  and as such the Act is ultra vires Articles 286(1)(a) and (b) of the Constitution.  The High Court was of the view that  the transaction of transfer of right to use goods is a species of bailment, as there is no transfer of ownership in such  transaction  and  since such transactions are  in  the nature  of  contract of bailment, the transfer is  completed only upon the delivery of the goods and, therefore, situs of sale  created by the Explanation to Section 2(10) of the Act is  valid.  Consequently, the writ petitions were dismissed. It  is in this way the appellants are in appeal before  this Court.  Excepting two States the provisions of the Sales Tax Acts  of  all the other States are on line with that of  the Maharashtra  Act.  Since the grounds of challenge to all the Acts  are substantially the same, we, therefore, propose  to decide these cases by a common judgment.

     (4)  S/Shri  K.R.Parasaran, R.F.Nariman and Harish  N. Salve,  learned senior counsel, appearing for the appellants and  the  petitioners urged, that there are two  independent limitations  upon  the  taxing power of the State  based  on situs  of the sale - one is engrafted in Article 286 and the other  where the sale occurs within the State, it cannot  by virtue  of Entry 54 of List II read with Entry 92A of List I levy  a tax on a sale which is in the course of  inter-State trade  or commerce and, therefore, Section 3 and Explanation to  Section 2(10) of the Maharashtra Act which seeks to levy tax  on  mere  location of goods at the time  of  their  use within  the  State, are ultra vires Articles 286 and 269  of

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the  Constitution.  Their further argument is that,  taxable event of such transaction of sale would be upon the transfer in law of the right to use goods in question and, therefore, the  situs of transaction of sale would, on first principle, be  the situs of the contract which has the effect in law of transferring  the right to use goods and, therefore, no such tax can be levied merely on location of goods in that State. Shri S.K.Dholakia, learned senior counsel, appearing for the State  of Maharashtra contended that, in the absence of  any enactment  by  the Parliament, the nature of  contract  i.e. the  transfer of right to use goods is to be determined with reference  to law dealing with contract, namely, the  Indian Contract  Act,  and in that connection referred to  Sections 148  and 149 of the Indian Contract Act.  According to  him, the  transfer of the right to use goods being in the  nature of  a  contract  of  bailment, there  must  be  delivery  or possession  of goods before it can be said that the right to use  is transferred.  According to him, until the goods  are delivered  to the lessee it is only an agreement to give  it on  bailment and, in fact, the delivery of goods is sine qua non  of the transfer of right to use goods.  Thus, the State legislature  was fully competent to enact the Explanation to Section  2(10)  of the Act.  In brief, the argument is  that the  taxable event would be the location of goods - delivery of  which is to be effected for use.  Shri C.S.Vaidyanathan, learned Additional Solicitor General, appearing for Union of India,  Shri  A.K.Ganguly, learned senior counsel  appearing for  the State of Tamil Nadu, Shri K.  Ram Kumar,  appearing for the State of Andhra Pradesh, Shri Adarsh Goel, appearing for  the  States of Uttar Pradesh and the State of  Haryana, Shri  S.K.   Jain, appearing for the State of Rajasthan  and Shri  M.Veerappa for the State of Karnataka argued, that the taxable event of such transaction of deemed sale would be on the  location  of  goods  the delivery of  which  is  to  be effected  for use within the State.  They further  contended that,  in  view  of  the   decision  in  the  second  Gannon Dunkerleys case (supra), the provisions of Section 4 of the Central  Sales  Tax  Act  are  applicable  to  deemed  sales envisaged  under  clause  (29A)(d)  of Article  366  of  the Constitution and, therefore, on the application of Section 4 of the Central Sales Tax Act, States legislatures were fully competent  to  levy  sales tax if the goods at the  time  of their use are located within their States.

     (5)  On  the  argument  of  learned  counsel  for  the parties,  the questions that arise for consideration are (a) what  are the limitations on the power of States to levy tax on  the  transactions of transfer of right to use any  goods and  (b) where is the situs of taxable event on the transfer of  right  to  use goods under Article  366(29A)(d)  of  the Constitution.   Before we deal with the aforesaid questions, it  would be helpful to look into the legislative history of levy  of sales tax in this country and the decisional law in order to resolve the controversy before us.

     (6)  The power of the State legislature to levy  sales tax  first time found place by virtue of Entry 48 of List II of  the  Seventh  Schedule of the Government of  India  Act, 1935.  The Entry was to the following effect:-

     taxes on sale of goods and on advertisement.

     In   exercise  of  the   aforesaid  power,  the   then Provincial  legislatures  levied sales tax on the  sale  and purchase  of  a number of commodities.  Government of  India

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Act  did  not  make any provision about situs  of  sale  for purposes  of  levy  of  sales tax  by  the  then  Provincial legislatures   with   the  result,   the   then   Provincial legislatures  on the basis of one or more than one  elements constituting  sale made it as the basis for levy of tax by legislations.   Some  of the States levied sales tax  merely because the goods were located within their provinces at the time  of  contract.  In the province of Bihar, if the  goods were  produced and manufactured inside the province, it  was made  a  basis  for levy of tax, as a result  of  which  one transaction  of  sale was subjected to levy of sales tax  by more  than  one  Provinces  resulting   in  burden  on   the consumers.  These difficulties were well taken care of while framing  the Constitution and, as a result of which we  find Articles 286, as it existed in the Constitution, when it was enforced.  Relevant Article 286 is reproduced below:-

     Article 286.  Restrictions as to imposition of tax on the  sale or purchase of goods  (1) 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  the import of the goods into, or export of the goods out of, the territory of India.

     Explanation.   For the purposes of clause (a), a sale or purchase shall be deemed to have taken place in the State in  which the goods have actually been delivered as a direct result  of  such  sale  or   purchase  for  the  purpose  of consumption  in  that State, notwithstanding the  fact  that under the general law relating to sale of goods the property in  the goods has by reason of such sale or purchase  passed in another State.

     (2)  Except insofar as Parliament may by law otherwise provide,  no  law of a State shall impose, or authorise  the imposition  of,  a tax on the sale or purchase of any  goods where  such  sale or purchase takes place in the  course  of inter-State trade or commerce:

     Provided  that the President may by order direct  that any  tax  on the sale or purchase of goods which  was  being lawfully  levied by the government of any State  immediately before   the  commencement  of   this  Constitution   shall, notwithstanding  that the imposition of such tax is contrary to  the  provisions  of this clause, continue to  be  levied until the day of March 31, 1951.

     (3)  No  law  made  by  the  legislature  of  a  State imposing,  or  authorizing 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.

     (7)  Entry  54 of List II of Seventh Schedule  to  the Constitution as it existed on the date of enforcement of the Constitution is extracted below:-

     54.   Taxes  on the sale or purchase of  goods  other than newspapers

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     (8)  After  the commencement of the Constitution,  two sets  of controversies arose as regards the power of  States legislatures  to  levy sales tax on transactions of sales firstly,  with  reference to clauses (1) and (2) of  Article 286  as  it  existed  prior to the Sixth  Amendment  of  the Constitution   and   secondly,  with    reference   to   the transactions   of  works  contract.    The  Explanation   to definition  of sale in the Bombay Sales Tax Act, 1952 gave rise  to  first controversy.  The said Explanation  provided that sale of any goods which have actually been delivered in the  State of Bombay as a direct result of such sale for the purposes  of consumption in the said State, shall be  deemed for the purpose of the Act to have taken place in the State, irrespective of the fact that the property in the goods has, by  reason  of  such sales, passed in  another  State.   The question,   therefore,  arose  as  to  whether   the   State legislature   of  Bombay  could  levy   sales  tax  on   the transactions  of sales merely on the basis that goods, as  a result  of  such sales, were located for consumption  within its  State although sales are exempted under Article  286(2) of  the Constitution.  The Bombay High Court, on a  petition under  Article  226  of the Constitution,  struck  down  the aforesaid provision being of the view that the definition of sale  in the Bombay Sales Tax Act was repugnant to Article 286  of the Constitution.  But, the said decision of  Bombay High  Court was reversed by the Supreme Court in the case of State  of Bombay and another vs.  United Motors (India) Ltd. and  others  (1953) SCR 1069.  However, the controversy  did not  abate and correctness of decision in the case of United Motors   (supra),  was  doubted   and,  therefore,  it   was reconsidered  in The Bengal Immunity Company Ltd.  Vs.   The State  of  Bihar and Ors.  (1955) SCR, 603, wherein  it  was held, as thus:

       The  operative provisions of the several  parts  of Art.   286, namely clause (1)(a), clause (1)(b), clause  (2) and  clause  (3) are intended to deal with different  topics and,  one  cannot  be  projected or read  into  another  and therefore  the  Explanation  in   clause  (1)(a)  cannot  be legitimately  extended to clause (2) either as an  exception or  as  a proviso thereto or read as curtailing or  limiting the ambit of clause (2).

     xxx xxx xxx

     What  is an inter-State sale or purchase continues  to be  so  irrespective  of the State where the sale is  to  be located  either  under  the general law when it  is  finally determined what the general law is or by the fiction created by  the  Explanation.   The situs of a sale or  purchase  is wholly irrelevant as regards its inter-State character.

     Until Parliament by law made in exercise of the powers vested  in it by clause(2) of Art.  286 provides  otherwise, no  State can impose or authorize the imposition of any  tax on  sales or purchases of goods when such sales or purchases take  place in the course of inter- State trade or  commerce and  the  majority decision in The State of Bombay vs.   The United  Motors  (India) Ltd.(1953) SCR 1069 in so far as  it decides  to the contrary cannot be accepted as well  founded on principle or authority.

     In  nutshell,  it  was held that situs of a  sale,  as

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engrafted  in  Explanation to Article 286(1), as it  existed prior  to the Sixth Amendment of the Constitution, cannot be applied  to  clause  (2) of Article 286,  which  related  to inter-State  trade  or commerce and situs of sale is  wholly immaterial as regards its inter-State character.

     (9)  After  the decision in The Bengal  Immunity  case (supra),  certain  recommendations were made by Tax  Inquiry Commission, proposing certain amendments in the Constitution relating   to   levy   of    sales   tax.    The   aforesaid recommendations  were accepted and as a result of which  the Parliament  passed  the Constitution (Sixth Amendment)  Act, 1956  whereby, in List I of the Seventh Schedule Entry  92-A was added, which runs as under:-

     92-A.   Taxes on the sale or purchase of goods  other than  newspapers, where such sale or purchase takes place in the course of inter- State trade or commerce.

     Entry  54  in List II was substituted which  reads  as thus:-

     54.   Taxes  on the sale or purchase of  goods  other than  newspapers subject to the provisions of entry 92-A  of List I.

     Sub-clause  (g) was added to clause (1) and sub-clause (3)  was added to Article 269 of the Constitution, which are extracted below:-

     (g) taxes on the sale or purchase of goods other than newspapers,  where such sale or purchase takes place in  the course of inter- State trade or commerce.

     (3)  Parliament  may by law formulate  principles  for determining  when a sale or purchase of goods takes place in the course of inter- State trade or commerce.

     (10)  By virtue of the aforesaid amendment in  Article 269, the Parliament was empowered to levy and collect tax on sale  or purchase of goods where such sale or purchase takes place  in  the course of inter-State trade or commerce,  and also to lay down the principles for determining when sale or purchase  of goods takes place in the course of  inter-State trade  or  commerce.   The   Sixth  Amendment  also  omitted Explanation  to  clause (1)(a) of Article 286  and  further, clauses  (2) and (3) of Article 286 were substituted by  two new clauses.  Amended Article 286 read as under:-

     286.   Restrictions  as to imposition of tax  on  the sale  or  purchase of goods.   (1) 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 the import of the goods into, or export of the goods out of, the territory of India.

     (2)  Parliament  may by law formulate  principles  for determining  when a sale or purchase of goods takes place in

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any of the ways mentioned in clause (1).

     (3)  Any law of a State shall, insofar as it  imposes, or  authorises  the  imposition  of, a tax on  the  sale  or purchase  of  goods declared by Parliament by law to  be  of special  importance  in  inter-State trade or  commerce,  be subject to such restrictions and conditions in regard to the system  of  levy  rates and other incidents of  the  tax  as Parliament may by law specify.

     (11)  After  Sixth Amendment in the Constitution,  the Parliament  passed  an Act known as  The Central Sales  Tax Act,  1956.  The objects of the said Act were to  formulate principles  for determining when a sale or purchase of goods takes  place in the course of inter-State trade or  commerce or  outside  a State or in course of imports into or  export from  India,  to  provide  for   the  levy,  collection  and distribution  of  taxes on sales of goods in the  course  of inter-State  trade or commerce and to declare certain  goods to be of special importance in inter-State trade or commerce and  specify the restrictions and conditions to which  State laws imposing taxes on the sale or purchase of such goods of special importance shall be subject.  After the enactment of the  Central  Sales  Tax Act by the  Parliament,  the  first controversy stood resolved.

     (12)  Yet another controversy, as regards the power of the  State legislature to levy sales tax on transactions  of works  contract remained unresolved.  In Gannon Dunkerley  & Co.   vs.  State of Madras (AIR 1954 Madras 1130), the  High Court of Madras was of the view that the transaction of work contract  was  not a contract for sale of goods  as  defined under the provisions of Sales of Goods Act and, therefore, sales  tax  is  not leviable on the amount received  by  the contractors  from the persons for whom they had  constructed building  during the relevant assessment year.  However, the Kerala  High Court, the then High Court of Mysore, the  then High Court of Nagpur and the High Court of Rajasthan were of the  view  that, States legislatures were competent to  pick out  from  the composite transaction of  building  contract, which  included transfer of property in materials, and  make the  portion  attributable  to the cost  of  such  materials subject  to  payment of sales tax.  Ultimately, the  Supreme Court,  in  the  State  of Madras vs.   Gannon  Dunkerley  & Co.(Madras)  Ltd,  (1959) SCR 379 held, that in  a  building contract  which is one, entire and indivisible, there is  no sale  of  goods  and  is not within the  competence  of  the Provincial legislature under Entry 48 of List II in Schedule VII of the Government of India Act, 1935, to impose a tax on the supply of the materials used in such a contract treating it  as  a sale.  (13) After the decision of this Court  in Gannon  Dunkerley case (supra), States suffered losses as  a result  of  avoidance of Central Sales Tax Act  leviable  on inter-State  sales  of goods.  Therefore, the  matters  were referred   to  the  Law  Commission   of  India.   The   Law Commission,  after considering the matters referred to, made certain   recommendations  suggesting   amendments  in   the Constitution  in order to augment the revenue of the States. In  the  light  of recommendations of  the  Law  Commission, Parliament  passed Constitution (Forty-sixth Amendment) Act, whereby a new clause 29-A was inserted in Article 366 of the Constitution, which is extracted below:-

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     29-A.     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) a tax on the transfer of property in goods(whether as goods or in some other form) involved in the execution of a works contract;

     (c) a tax on the delivery of goods on hire-purchase or any system of payment by installments;

     (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) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

     (f)  a tax on the supply, by way of or as part of  any service  or in any other manner whatsoever, of goods,  being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is   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.

     (14)  Simultaneously, a new Entry 92-B was inserted in List  I  of Seventh Schedule to the Constitution,  which  is extracted as under:

     92-B.  Taxes on the consignment of goods (whether the consignment  is  to  the person making it or  to  any  other person), where such consignment takes place in the course of inter-State trade or commerce.

     (15)  In  clause (1) of Article 269, a sub-clause  (h) was  also  added  and  clause (3) of Article  269  was  also amended.  The amended provisions of Article 269 is extracted as under:

     (h)  taxes  on the consignment of goods (whether  the consignment  is  to  the person making it or  to  any  other person), where such consignment takes place in the course of inter-State trade or commerce..

     (3)  Parliament  may by law formulate  principles  for determining  when a sale or purchase of, or consignment  of, goods  takes  place  in the course of inter-State  trade  or commerce.

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     (16)  By  Forty-sixth  Amendment, Article 286  of  the Constitution  was also amended by substituting clause (3) by a new clause which reads as thus:

     (3)  Any law of a State shall, insofar as it imposes, or authorises the imposition of, -

     (a) a tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce;

     (b)  a  tax on the sale or purchase of goods, being  a tax  of the nature referred to in sub-clause(b), sub- clause (c) or sub-clause (d) of clause (29-A) of Article 366

     be  subject  to  such restrictions and  conditions  in regard  to the system of levy, rates and other incidents  of the  tax as Parliament may by law specify.  (17) After  the Forty-sixth  amendment, States legislatures became competent to  levy sales tax on deemed sales envisaged in clause (29A) of   Article   366  of   the  Constitution   although   such transactions were not sales within the meaning of sale and most  of  the States legislatures enacted law to levy  sales tax  on  deemed  sale in terms of the provisions  of  clause (29A)  of  Article  366 of the Constitution, and  sought  to assess   the  contractors  on   the  transactions  of  works contracts.  It is at this stage writ petitions were filed in this  Court challenging such levy contending, that the power of  States legislatures to levy tax on transfer of  property in  goods  involved  in  the execution  of  works  contracts referred  to  in sub-clause (b) of clause (29A)  of  Article 366,  is in excess of power conferred on States  legislature under Entry 54 List II.  The respondent-States in those writ petitions  defended  the levy on the ground that  sub-clause (b) of Article 366(29A) bestowed on them a power to levy tax on  works contract independent of Entry 54 of List II.  This Court in the case of Builders Association (supra) held, that the  power  of  the State legislature to levy tax  on  works contract  is subject to the limitation contained in  clauses (1),  (2) and (3) of Articles 286 and 269.  Again, in second Gannon  Dunkerleys case (supra), this Court reiterated that levy  of  sales tax under sub-clause (b) of clause (29A)  of Article  366 is subject to the discipline to which any  levy under  Entry  54  of the State List is made subject  to  the Constitution,  as  held  in the Builders  Association  case (supra).

     (18)  We have traced the history as regards the  power of States legislatures to levy sales tax only to find out as to  whether  the power of States legislatures to levy  sales tax under clause (29A) (d) of Article 366 is subject to same limitations, as noticed in the earlier decisions.

     (19) Following the decisions referred to above, we are of  the view that 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

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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  Art.  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.

     (20)  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.Ltds  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 or otherwise.

     (21)   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, and there  is no  settled  principles for determining the situs  of  sale. There  are  conflicting views on this question.  One of  the principles   providing  situs  of   sale  was  engrafted  in Explanation  to clause (1) (a) of Article 286, as it existed prior  to  the  Constitution (Sixth  Amendment)  Act,  which provided that the situs of sale would be where the goods are delivered  for  consumption.  The second view is,  situs  of sale  would  be the place where the contract  is  concluded. The  third view is, that the place where the goods are  sold or  delivered  would be the situs of sale.  The fourth  view is,  that where the essential ingredients, which complete  a sale,  are  found  in majority would be the situs  of  sale. There  would  be no difficulty in finding out situs of  sale where  it  has  been  provided  by  legal  fiction  by   the appropriate  legislature.   In the present case, we  do  not find  Parliament  has,  by creating any fiction,  fixed  the location  of  sale in case of the transfer of right  to  use goods.  We, therefore, have to look into the decisional law.

     (22)  In  Indian Copper Corporation Limited  vs.   The State  of  Bihar and others, 1961 (2) SCR,276, the  question arose  as  to where would be the situs of sale incase  of  a transaction  which was not covered by Explanation to  clause (1)(a)  of Article 286, as it existed prior to  Constitution

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(Sixth  Amendment)  Act.   In  the   said  case,  the   sale transaction  took place in the State of Bihar and the  goods were  sent to outside the State, but not for consumption  in such  State of first destination.  The State of Bihar levied sales  tax  on such transaction.  This Court, in  the  above case, held thus :

       If a single State was designed to have the power to tax  any  particular transaction of sale, the question  that next  falls  to be considered is the determination  of  that State  in  regard to which it could be predicated  that  the sale  in question was not  outside that State or in  other words,  the determination of the particular State in  regard to  which  it could be said that the sale was inside  that State.    The  key  to  the   problem  is  afforded  by  two indications in the Article itself:  (1) the opening words of Article  286(1)  which  speak of a sale or  purchase  taking place  and  (2) the non-obstante clause in  the  Explanation which  refers to the general law relating to sale of  goods under  which  property in the goods has, by reason  of  such sale  or  purchase,  passed  in another  State.  These  two together  indicate that it is the passing of property within the  State  that  is  intended to be fastened  on,  for  the purpose  of  determining,  whether the sale in  question  is "inside"  or "outside" the State, and therefore, subject  to the  operation  of  the "Explanation that  State  in  which property passes would be the only State which would have the power  to  levy a tax on the sale.  As was explained in  the recent  decision of this Court in Burmah Shell Oil Storage & Distributing  Co.,  of  India, Ltd vs.  The  Commercial  Tax Officer:

     By  sale  here  (Art.286(1)(a)   is  meant  completed transaction  by which property in the goods passes.   Before the  property in the goods passes,  the contract of sale is only  executory, and the buyer has only a chose in  action. .The  Constitution thinks in terms of a completed  sale by  the passing of property and not in terms of an executory contract for the sale of goods.

     Notwithstanding  that  is not an outside  sale,  the power  of  the  State  to  tax might  be  negatived  by  the operation  of  the  Explanation which  by  its  non-obstante clause   shifts the situs of the sale and renders the  sale transaction  one within the delivery-cum-consumption  State, i.e.   as  the State in which the sale transaction  much  be deemed  to  take place.  Where the terms of the  Explanation are satisfied, the sale transaction will, by a legal fiction created by it, be deemed to take place inside the State of delivery  and  therefore  outside the State in  which  the property  passes.  The conclusion reached therefore is  that where  the property in the goods passes within a State as  a direct  result  of  the sale, the sale  transaction  is  not outside the State for the purpose of Art.  286(1)(a), unless the  Explanation operates.  We need also add that the  power of  the State to impose the tax might still not be available unless  the  transaction  in question is unaffected  by  the other  bans imposed under sub-clause (1)(b), (2) and (3)  of Art.   286.  The submission therefore of learned counsel for the appellants, that in respect of non-Explanation sales the State  of Bihar has no power to levy a tax by reason of such sales  being outside the State within Art.  286(1)(a) must be rejected.

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     In  brief,  it  was held that, where a  sale  was  not covered  by Explanation to clause (1)(a) of Article 286, the State  in  which property in goods passes would be the  only State which would have the power to levy a tax on the sale.

     (23)   In   A.V.Thomas  &   Co.   Ltd.   vs.    Deputy Commissioner  of Agricultural Income Tax, 1963 Supp.(2) SCR, 608,  the  goods  (teas)  were  stored  in  the  godowns  at Willingdon  Island  which  was in the  State  of  Travancore Cochin  and  from  there samples of tea were taken  to  Fort Cochin  which  at  the  relevant time was in  the  State  of Madras.   There, at Fort Cochin, samples of tea were sold by public  auction  in  lots.   Some were  purchased  in  their entirety  and  others in parts and after  the  consideration money  was paid at Fort Cochin delivery orders were given to the  buyers  addressed to the godown keepers  at  Willingdon Island  and  actual delivery of tea was taken there.   These teas were then sent out from Willingdon Island in Travancore Cochin  for  consumption either in other parts of  India  or were  exported  out  of  India.  The question  arose  as  to whether  the State of Travancore Cochin could levy sales tax on  the location of goods.  As there was no delivery of  tea as  a  direct result of sale for purposes of consumption  in any  particular  State,  Explanation  to  clause  (1)(a)  of Article  286  as  it existed prior  to  Constitution  (Sixth Amendment) Act, was not available.  Since there was no legal fiction  to determine the situs of sale it was held that the sale  was "outside" sale and was not inside sale qua State of  Travancore  Cochin because the property in goods  passed when the contract was accepted on the fall of hammer in Fort Cochin  which  was  in the State of  Madras.   The  relevant extract of the judgment is reproduced below:

     that  the  property  in  the goods  passed  when  the contract  was  accepted  on the fall of the hammer  in  Fort Cochin.   Under  Art.   286(I) it was the  passing  of  the property  within the State that was intended to be fastened on  for  the  purpose of determining whether  the  sale  was inside  or outside the State.  Subject to the  operation of  the  explanation that State in which  property  passed would  be the only State which would have the power levy the tax  on the sale.  But the explanation did not apply in  the present  case as there was no delivery as a direct result of the sale for consumption in any particular State.

     (24)  The aforesaid decisions unambiguously laid  down that  where  situs of sale has not been fixed or covered  by any  legal  fiction created by the appropriate  legislature, the  location  of sale would be place where the property  in goods  passes.  The Constitution Bench held, that it was the passing  of the property within the State that was  intended to be fastened on for the purpose of determining whether the sale was inside or outside the State.

     (25)  It was then urged on behalf of respondents that, it  is the location of goods where they are put to use would furnish  the situs of sale.  According to them, there  would be  no  completed transfer of right to use goods  until  the goods are delivered.  We have traced the legislative history of  sales  tax in this country only to show that,  excepting where  the appropriate legislature by creating legal fiction fixed the situs of sale on location or delivery of goods for consumption  like omitted Explanation to Article  286(1)(a), there is no authority to show that mere location or delivery of goods would be the situs of sale.  Here, we would like to

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cite  an  appropriate illustration given in the decision  in Bengal   Immunitys   case(supra)  only   to   resolve   the controversy before us.  The illustration given is as under:

     Take,  for instance, a case where both the seller and the  buyer  reside and carry on business in Gurgaon  in  the State of Punjab.  Let us say that the seller has a godown in the  State of Delhi where his goods are stored and that  the buyer has also a retail shop at Cannought Circus also in the State  of  Delhi.   The buyer and the seller  enter  into  a contract at Gurgaon for the sale of certain goods and a term of the contract is that the goods contracted to be sold will be  actually  delivered  from  the sellers  godown  to  the buyers  retail  shop,  both  in the  State  of  Delhi,  for consumption  in  the  State  of  Delhi.   Pursuant  to  this contract  made in Gurgaon in the State of Punjab, the  buyer pays  the full price of the goods at Gurgaon and the  seller hands  over  to the buyer also at Gurgaon a  delivery  order addressed  to the seller’s godown-keeper in Delhi to deliver the goods to the buyers retail shop.  As a direct result of this sale the sellers godown-keeper, on the presentation of this  delivery  order,  actually delivers the goods  to  the buyers  retail shop at Connaught Circus for consumption  in the  State  of Delhi.  On one view of the law, the situs  of such  a  sale would be Gurgaon.  We need not decide that  it is, because that type of case is not before us and there may be  other views to consider, but it is certainly a  possible view.   It  is  also  possible  to hold  that  this  is  not inter-State  trade or commerce, because there is no movement of goods across a State boundary.  Again, we need not decide that  because  that  also may be controversial.   But  given these  two  postulates the transaction would  fall  squarely within  the  Explanation  and yet it would not  come  within clause (2), for there is no movement of the goods across the border of any State and both the seller and the buyer are in the  same place.  Surely, the Explanation will, in presenti, govern  such  cases  irrespective of whther  Parliament  has lifted  the  ban under clause (2).  If these postulates  are accepted  then  by  virtue of clause (1)(a)  read  with  the Explanation  the  State of Delhi alone will be  entitled  to impose  a  tax on such a sale or purchase and the  State  of Punjab  will  be  precluded from doing so by reason  of  the fictional  situs  assigned  to such a sale  or  purchase  by Explanation,  although the contract was made, price was paid and  symbolical or constructive delivery of the goods by the handing  over of the delivery order took place in Gurgaon in the State of Punjab.

     We,  therefore, find that 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

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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.

     (26)  Next question that arises for consideration  is, where  is the taxable event on the transfer of the right  to use  any  goods.   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.

     (27)  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

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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.

     (28)  No  authority  of this Court has been  shown  on behalf  of  respondents  that there would  be  no  completed transfer  of  right  to  use  goods  unless  the  goods  are delivered.   Thus, the delivery of goods cannot constitute a basis  for  levy of tax on the transfer of right to use  any goods.   We are, therefore, of the view that 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.

     (29)  Learned  counsel  representing  the  respondents States  contended that by virtue of application of Section 4 of  the  Central  Sales  Tax Act,  States  legislatures  are competent to enact law imposing tax on the transfer of right to  use goods if the goods are located for use within  their States  and placed reliance on the decision of this Court in second  Gannon  Dunkerley  &  Co.   (supra).   The  relevant passage of the said judgment runs as under:

     The  question whether a sale is an outside sale or  a sale  inside the State or whether it is a sale in the course of import or export will have to be determined in accordance with  the  principles contained in Sections 4 and 5  of  the Central  Sales  Tax  Act  and the  State  Legislature  while enacting the sales tax legislation for the State cannot make a departure from those principles.

     (30)  The  aforesaid contention advanced has no  merit and  reliance on the second Gannnon Dunkerly & Co.(supra) is totally  misplaced.  It may be noted that after  Forty-sixth amendment  of the Constitution, the definition of sale  in the  Central Sales Tax Act has not been amended and  further this  Court  in  second Gannon Dunkerleys  case(supra)  was dealing  with  the  question of levy of sales tax  on  works contract  as envisaged in Article 366(29A)(b) and not  under Article  366(29A)(d).   In second Gannon  Dunkerleys  case, this  Court  has construed sub-clause(b) of clause (29A)  of Article  366  as  conferring power to split the  single  and indivisible  contract  into one for sale of goods and  other for  supply  of labour and services and as a result  such  a contract  which was single and indivisible has been  brought at  par with a contract containing two separate  agreements. Since  tax was held as tax on sales of goods and, therefore, it  was  held that principles contained in Section 4 of  the Central  Sales  Tax Act would apply to transaction of  works

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contract  as  envisaged in clause (29A)(b) of  Article  366. Moreover,  the transactions contemplated under Section 4  of the  Central Sales Tax Act involve series of events and  for that reason it has no application to the present case.

     (31)  It  was  then argued that if Section  4  of  the Central  Sales  Tax is not applicable to the transaction  of deemed  sale  under 366(29A)(d), the same may be applied  by analogy for determining the situs of sale of the transfer of the  right to use goods.  We have already held that 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.

     (32)  Coming  to  the question that a  transaction  in question  is in the nature of a contract of bailment, it  is true  that  the High Court of Bombay in the  judgment  under appeal  has  taken  the view that the  transactions  of  the transfer  of  the  right to use goods are in the  nature  of bailment.   If such a view is taken then the State would not have  the  power  to levy sales tax  on  such  transactions. Unless  such transaction is held to be a sale or deemed sale in  law  and it is only then the State legislature would  be competent to enact law to levy tax under Entry 54 of List II of Seventh Schedule.  The levy of tax is not on use of goods but  on the transfer of right to use goods.  The High  Court proceeded  on the footing that the transfer of right to  use is  different  from sale or deemed sale without  considering the  legal fiction engrafted in clause (29A) of Article  366 of  the  Constitution.  We are, therefore, of the view  that the reasoning of the High Court in upholding the Explanation to  Section  2(10) of the Act is not tenable in  law.   This question  is also related to another question which falls to be  considered, namely, whether the State of Maharashtra can levy  tax  on the transaction which is an inter-State  sale. The  Bombay  High Court expressed the view that in  case  of transfer of right to use goods when agreement is made in one State  for giving delivery of goods for use by the lessee in another  State, the movement precedes a transfer of right to use  i.e.   the  movement  is antecedent  to  the  completed transaction  and only upon delivery of goods the transfer of right  to  use is completed as the transfer of right to  use goods  is not concluded merely by execution of an  agreement or  document.   In view of the fact that the transaction  in question  is  deemed  sale and definition of sale  in  the Central  Sales Tax Act is not amended, the said reasoning of the  High Court is not only erroneous, but runs contrary  to two  decisions  of this Court -(i) Builders  Association  of India  (supra)  and  (ii)  M/s.  Gannon  Dunkerley  and  Co. (supra)  wherein,  it  was categorically held that,  in  the determination of inter- State character of sale the situs of sale  is  immaterial.  When goods are entrusted to a  common carrier  for delivery, it amounts to delivery to  consignee. If  it  takes  place  outside   the  State,  the  fact  that subsequently goods have reached the State where they are put to  use, cannot be ground for determining the tax  liability on  the ground that the goods are located in that State  for use.

     (33) During the course of argument an apprehension was expressed  that,  in  case we take the view which  have  now taken  in  our judgment, many unscrupulous  companies  would shift  their head offices to neighbouring countries only  to avoid  sales  tax.  It is true that in such cases the  State

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would not be competent to levy tax on the transfer for right to  use  any goods.  Shri K.  Parasaran, the learned  senior counsel  is right when he contends that such apprehension is not  justified  as  the  Parliament has  ample  power  under Article 246 of the Constitution to plug such loopholes.

     (34)  Shri Harish Salve, learned senior counsel raised an additional argument that Section 3 of the Maharashtra Act levied  tax  on the transfer of right to use goods  effected before   the  date  of   commencement  of  the  Constitution Forth-sixth  Amendment Act, 1982 which inserted clause (29A) in  Article  366 of the Constitution and, therefore,  it  is ultra  vires.  As the appellants are to succeed on the first ground, we are not disposed to go into the said question.

     (35)  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.

     (36)  In  the light of what we have stated  above,  we will  examine  the provisions of the various Acts which  are impugned in the present case.

     (37)  These  civil  appeals  and  writ  petitions  are pending  for  a  considerable  period  of  time  and  during pendency  of  these  cases  many States  have  made  various amendments  in  their  State Acts but the appeals  and  writ petitions  were  not  accordingly  amended.   We  have  been supplied  with  photocopies  of the provisions of  the  Acts during  hearing  of  these   matters.   We  are,  therefore, noticing the provisions of the Acts as they are contained in the  copies  supplied  to  us by  learned  counsel  for  the parties.

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     (38)  Maharashtra  Act  -  In  earlier  part  of  this judgment  we  have  already reproduced  the  Explanation  to Section  2(10)) of the Act.  The said Explanation fixes  the situs of deemed sale in respect to the transfers of right to use  any goods.  The said Explanation deems the transfer  of right  to  use  any goods to have occurred in the  State  of Maharashtra if the goods are located within the State at the time of their use, irrespective of the place where agreement of  such  transfer  of the right is made  and  therefore  it widens  the  scope  of  the definition of sale  so  as  to include  deemed  sales  (i)  which  are  in  the  course  of inter-State  trade  and commerce and (ii) sales outside  the State of Maharashtra and (iii) sales which occasioned import of  goods  into  India.  Section 3 of  the  Maharashtra  Act provides incidence of tax.  It lays down that subject to the provisions  contained  in  the Act and rules, tax  shall  be leviable  on  the turnover of sales and  therefore  turnover necessarily  has  to  include outside sale and sale  in  the course  of  inter-State trade and commerce and  sales  which occasioned import of goods.  Although Section 8-A of the Act (as  referred to in written notes), provides that nothing in this  Act would be deemed to impose or authorise  imposition of  any tax on a sale outside the State or in the course  of the  import  or export or inter-State trade or commerce  but the  Explanation has not been amended accordingly.  There is a  provision  for exemption of turnover related to goods  in respect  of which tax has already been paid under the Bombay Sales  Tax  Act,  1952 but there is no provision  that  such exemption  would  be available in case of goods  which  have suffered  sales tax under the other Sales Tax laws.  We are, therefore,  of  the view that since the Explanation has  not been  amended in conformity with Section 8-A of the Act, the Explanation   to  Section  2(10)  of  the  Maharashtra   Act transgresses  the  limits of legislative power conferred  on the  State  legislature  under Entry 54 of List II  and  we, thus,  instead  of  striking  it   down,  direct  that   the Explanation  to Section 2(10) 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.

     (39)  Karnataka Act.  The tax on the transfer of right to  use any goods is levied under the General Sales Tax Act, namely  The  Karnataka Sales Tax Act.  Section 2(t)  of  The Karnataka Sales Tax Act, 1957 defines sale as under:

     Sale with all its grammatical variations and cognate expressions   means  every  transfer  of  the  property   in goods(other than by way of a mortgage, hypothecation, charge or  pledge) by one person to another in the course of  trade or  business  for  cash  or for deferred  payment  or  other valuable consideration (and includes, -

     (i) xxxx (ii) xxxx (iii) xxxx;

     (iv)  a 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).

     The above definition of Section 2(t) has Explanations. The relevant portions of which are being reproduced below:

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     Explanation  3.   (a) The sale on purchase of  goods (other  than in the course of inter-State trade or  commerce or  in the course of import or export) shall be deemed,  for the  purposes of this Act, to have taken place in the  State wherever  the  contract of sale or purchase might have  been made, if the goods are within the State-,

     (a) xxxx (i) xxxx (ii) xxxx (b) xxxx (c) xxxx

     (d) Notwithstanding anything contained in the Sales of Goods  Act,  1930  (Central  Act No.  3 of  1930),  for  the purpose  of  this Act, the transfer of the right to use  any goods for any purpose(whether or not for a specified period) of shall be deemed to have taken place in the State, if such goods  are  for  use within the State, irrespective  of  the place where the contract of transfer of the right to use the goods is made.

     The  provisions of Section 5(3) of the Act provide for a  single  point tax.  Section 5C is a charging section  for levy  of  tax  on the transfer of right to  use  any  goods. Section 5C is reproduced as under:

     5-C.  Levy of tax on the transfer of the right to use any   goods.     Notwithstanding   anything  contained   in sub-section (1) or sub-section (3) of Section 5, but subject to  sub-sections (4), (5) and (6) of the said section, every dealer  shall pay for each year a tax under this Act on  his taxable  turnover in respect of the transfer of the right to use any goods mentioned in column(2) of the Seventh Schedule for  any purpose (whether or not for a specified period)  at the  rates specified in the corresponding entries in  column (3) of the said Schedule).

     (40)  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.   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  5C.   Therefore, Explanation (3)(d) to Section 2(t) of the Act has to be held in  excess  of  legislative  power conferred  on  the  State legislature  under  Entry  54  of List  II  of  the  Seventh Schedule  of 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 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.

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     (41)  Tamil  Nadu.  The Tamil Nadu General  Sales  Tax Act,  1959  also levies tax on transfer of right to use  any goods.  Section 2(n) defines sale as under:

     sale with all its grammatical variations and cognate expressions  means  every transfer of the property in  goods (other  than by way of a mortgage, hypothecation, charge  or pledge)  by one person to another in the course of  business for  cash, deferred payment or other valuable  consideration and includes

     (i)  xxxx (ii) xxxx (iii) xxxx (iv) a 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.

     The above definition has Explanations and the relevant Explanation (3) is extracted below:

     Explanation  (3)  (a) The sale or purchase of  goods shall be deemed, for the purposes of this Act, to have taken place  in  the  State,  wherever the  contract  of  sale  or purchase  might have been made, if the goods are within  the State-"

     (i) xxxxx (ii) xxxxx (b) xxxxx

     Explanation 3(a) to Section 2(n) of the Act deems sale to have occurred in the State of Tamil Nadu if the goods are located  within  the  State.  Although  the  Explanation  is general  in  character, the petitioners contended  that  the said Explanation is being applied in the case of transfer of right  to  use any goods which have taken place outside  the State  or  an  inter-State  sale.    During  the  course  of argument,  learned counsel appearing for the State of  Tamil Nadu  contended  that the said Explanation is applicable  in cases  where the transfer of right to use goods takes  place outside the State, and the State is empowered to levy tax on such  transaction  of deemed sale, if the goods are  located within  the  State.  Further, in Section 3(A), the rates  of tax  has  not been specially prescribed.  Following what  we have  stated  earlier, we hold that the 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.

     (42)  Haryana.   Haryana General Sales Tax  Act,  1973 also  levies  tax  on transfer of right to  use  any  goods. After  Forty-  sixth  Amendment, the Act has  been  amended. Section 2(l) defines sale, which runs as under:

     Sale  means  any transfer of property in  goods  for cash or deferred payment or other valuable consideration and includes-

     (i) xxxx (ii) xxxx (iii) xxxx

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     (iv)  transfer  of the right to use any goods  (except tents,  kanats, chholdari, crockery, utensils, furniture and all other goods dealt with by the tent dealers as also other allied dealers for decoration and lighting purposes) for any purpose  (whether  or not for a specified period) for  cash, deferred payment or other valuable consideration;

     The charging section in relation to tax on transfer of right  to  use any goods is under the general provisions  of the Sales Tax Act.  Note 4 of Section 2(e) reads as thus:

     Note  (4) A sale falling under sub- clause(iv) shall be  deemed to have taken place within the State if the goods in  respect  of which right to use has been transferred  are within the State at the time of their use.

     Note (4) is substantially akin to explanation impugned in  the  Maharashtra  Act.   Note (4) widens  the  ambit  of definition  of sale by including outside sale, inter-State sale  and import into the territory of India.  Following the reasoning  given earlier, we direct that 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.

     (43) Uttar Pradesh.  Uttar Pradesh Trade Tax Act, 1948 also  levies  tax  on transfer of right to  use  any  goods. Section 2(h) defines sale, which is reproduced below:

     Sale  with  its grammatical variations  and  cognate expressions,  means  any  transfer  of  property  in   goods (otherwise  than by way of a mortgage, hypothecation, charge or  pledge)  for cash or deferred payment or other  valuable consideration and includes

     (i) xxxx (ii) xxxx (iii) xxxx

     (iv)  a 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.

     (44) Clause (ii) of Explanation I to Section 2(h) runs as under:

     in a case falling under sub-clause (iv), if the goods are  used by the lessee within the State during any  period, notwithstanding  that  the agreement for the lease has  been entered  into outside the State or that the goods have  been delivered to the lessee outside the State.

     (45)  Section 3.F is a charging section which provides tax  on  transfer  of  right  to use any  goods  and  it  is extracted as under:

     (1) Notwithstanding anything contained in section 3-A or  section  3-  AAA  or  section 3-D  but  subject  to  the provisions  of  sections 14 and 15 of the Central Sales  Tax Act, 1956, every dealer shall, for each assessment year, pay a tax on the net turnover of-

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     (a)  transfer  of the right to use any goods  for  any purpose  (whether  or not for a specified period) for  cash, deferred payment of other valuable consideration;  or

     (b) xxxx

     at  such  rate not exceeding fifteen percentum as  the State Government may, by notification, declare and different rates  may  be  declared for different  goods  or  different classes of dealers.

     (2)  For the purposes of determining the net  turnover referred  to in sub-section (1), the following amounts shall be  deducted from the total amount received or receivable by a dealer in respect of a

     (a)  transfer referred to in clause (a) of sub-section (1)  whether  such  transfer  was   agreed  to  during  that assessment year or earlier, -

     (i)  the  amount representing the value of  the  goods covered by sections 3, 4 and 5 of the Central Sales Tax Act, 1956;

     (ii)  the  amount representing the value of the  goods exempted under section 4;

     (iii)  xxxx  (iv) xxxx (v) xxxx (vi) xxxx  (vii)  xxxx (viii) xxxx (ix) xxxx (x) xxxx (xi) xxxx (xii) xxxx

     The  aforesaid  provisions  show that so  far  as  the inter-State  sales  are  concerned, in  substance,  are  not taxable,  but no provision has been made for declared goods. Yet,  there is another aspect.  By virtue of clause (ii)  of Explanation  I to Section 2 (h), the ambit of sale has  been widen  by including outside sale as inside sale on  mere location  of goods for use within the State irrespective  of the fact that the agreement for transfer of right to use has been  executed  outside  the State or whether  the  sale  is outside  the State, the tax is chargeable within the  State. And, further, on account of a special provision for rates of tax, the other provision such as single point tax as well as exemption  etc.   is  not applicable to the  transaction  of transfer  of  right to use any goods.  We find  that  clause (ii)  of  Explanation  I  of Section 2(h) is  in  excess  of legislative  power  under  Entry  54,  List  II  of  Seventh Schedule  and,  therefore,  we direct that  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.

     (46)  Rasjasthan.  The Rajasthan Sales Tax Act,  1994, levies tax on transfer of a right to use any goods.  Section 2(23) defines lease which is being reproduced below:

     Lease means any agreement or arrangement whereby the

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right to use any goods for any purpose is transferred by one person  to another whether or not for a specified period for cash,  deferred  payment  or  other  valuable  consideration without  the transfer of ownership, and includes a sub-lease but  does  not include any transfer on hire purchase or  any system of payment by installments;

     (47) Section 2(38) defines sale which runs as under: sale  -  with all its grammatical variations  and  cognate expressions means every transfer of property in goods by one person  to  another  for  cash, deferred  payment  or  other valuable consideration and includes

     (1)  a  transfer,  otherwise than in  pursuance  of  a contract, of property in goods for cash, deferred payment or other valuable consideration;

     (2) xxxx (3) xxxx

     (4)  a  transfer  of the right to use  goods  for  any purpose  (whether  or not for a specified period) for  cash, deferred payment or other valuable consideration;

     The  said sub-sections has Explanations.   Explanation II(b) runs as under:

      in a case falling under sub-clause (4), if the goods are  used by the lessee within the State, whether or not for a  specified period, notwithstanding that the agreement  for the  lease has been made outside the State or that the goods have  been  moved from outside the State or the  goods  have been delivered to the lessee outside the State.

     (48)  The  said  Explanation is substantially  on  the pattern  of Explanation to Section 2(10) of the  Maharashtra Act.   By  virtue of Explanation II(b) of Section  2(38)(4), the  definition of sale is enlarged and it includes  sales outside  the State or sales which are inter-State sales have been made chargeable if the goods are used within the State. Therefore,  the said Explanation is in excess of legislative power under Entry 54 of List II of Seventh Schedule and, we, accordingly  direct  that the Explanation II(b)  of  Section 2(38)  (4)  shall be read down to this effect that it  would not  be  applicable  to the transaction of the  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.

     (49) Andhra Pradesh.  The Andhra Pradesh General Sales Tax Act, 1957 levies tax on the transfer of right to use any goods.    Section  2(n)  defines   sale,  which  is  being reproduced below:

       Sale  with  all  its  grammatical  variations  and cognate  expressions means every transfer of the property in goods  whether  as  such  goods  or in  any  other  form  in pursuance  of  a  contract  or otherwise by  one  person  to another  in the course of trade or business, for cash or for deferred  payment,  or for any other valuable  consideration xxx  or in the supply or distribution of goods by a  society (including   a  co-  operative   society),  club,  firm   or association to its members, but does not include a mortgage, hypothecation or pledge of, or a charge on goods. The above

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sub-section has Explanations.  The relevant Explanations are reproduced below:

     Explanation   II  :-   (a)  Notwithstanding  anything contained in the Indian Sale of Goods Act, 1930 (Central Act III  of  1930) a sale or purchase of goods shall be  deemed, for  the  purpose  of this Act to have taken  place  in  the State,  wherever the contract of sale or purchase might have been made, if the goods are within the State.

     (i) xxxx (ii) xxxx (b) xxxx

     Explanation  IV:   -  A transfer of right to  use  any goods  for  any  purpose  (whether or not  for  a  specified period)  for  cash,  deferred   payment  or  other  valuable consideration shall be deemed to be a sale.

     The amended Section 5E of the A.P.  Act runs as under:

     Tax on the amount realised in respect of any right to use goods:

     Notwithstanding anything contained in this Act:  -

     (a)  Every  dealer who transfers the right to use  any goods  for  any  purpose, whatsoever, whether or not  for  a specified  period,  to  any  lessee or  licensee  for  cash, deferred  payment  or other valuable consideration,  in  the course  of his business shall, on the total amount  realized or  realizable by him by way of payment in cash or otherwise on  such  transfer or transfers the right to use such  goods from  the lessee or licensee, pay a tax at the rate of  five paise  in  every  rupee  of the  aggregate  of  such  amount realized or realizable by him during the year;

     (b)  the  transfer  of  right to use  any  such  goods entered  into  by any dealer, shall be deemed to have  taken place  in this State whenever the goods are used within  the State, irrespective of the place where the agreement whether written or oral for such transfer or right is made."

     Explanation   IV  to  the   definition  of  sale  as contained in Section 2(n) of the Act brings within its ambit tax  on transfer of right to use any goods.  Explanation  II of  Section 2(n) which is a general provision, provides that irrespective  of  the  place where the contract of  sale  or purchase might have taken place, if the goods are within the State, it will be included within the definition of ’sale

     (50) Clause (b) of Section 5.E deems that any transfer of  right of goods entered into by any dealer, is deemed  to have  taken place in the State if the goods are used  within the  State irrespective of the place where the agreement has taken  place.   Relevant provisions of Section 38  is  being reproduced below:

     Nothing  contained  in  this Act shall be  deemed  to impose  or authorize the imposition of a tax on the sale  or purchase  of  any goods, where such sale or  purchase  takes place -

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     (i) outside the State;  or

     (ii) in the course of the import of the goods into, or export of the goods out of the territory of India;  or

     (iii) in the course of inter-State trade or Commerce

     Explanation  :   The provisions of chapter II  of  the Central  Sales Tax Act, 1956 (Central Act 74 of 1956), shall apply for the purpose of determining when a sale or purchase takes  place in the course of inter- State trade or commerce or outside a State or in the course of import or export.

     (51)  Although, the aforesaid Section was required  to be  amended  after  the ITC Classics case under  appeal,  it remained  unamended  and its Explanation provides  that  the provisions  of Chapter II of the Central Sales Tax Act, 1956 shall  apply  for the purpose of determining when a sale  or purchase  takes place in the course of inter-State trade  or commerce  or  outside a State or in the course of import  or export.

     (52) We have already held that since the definition of sale  so  far as it relates to transaction of transfer  of right to use any goods is concerned in Central Sales Tax Act has  not  been amended, the provisions of Section 4  of  the Central  Sales  Tax  Act  will not  be  applicable  to  such transactions.   Thus, we find that clause (b) of Section 5.E is  in excess of legislative power of the State under  Entry 54  of  List II of Seventh Schedule.  We, therefore,  direct that clause (b) of Section 5.E 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.

     (53)  Following  what we have stated above, we are  of the  opinion  that the decision of the Bombay High Court  in 20th  Century  Finance  Corporation   Ltd.   Vs.   State  of Maharashtra  (1989) 75 STC, 217 (under appeal) is erroneous, whereas,  we affirm the decision of the Andhra Pradesh  High Court  in ITC Classics Finance & Services vs.   Commissioner of Commercial Taxes (1995) 97 STC, 330 (under appeal).

     (54) For the aforesaid reasons, all the civil appeals, writ  petitions  and the transferred case,  excepting  civil appeal  Nos.   6218-23/95, deserve to be allowed  and  civil appeal   Nos.    6218-  23/95   deserve  to  be   dismissed. Consequently,  we  set  aside  the  judgments  under  appeal excepting  in  CA  Nos.6218-23/95.  All  the  civil  appeals excepting C.A.  Nos.6218-23/95, writ petitions under Article 32, the transferred case and the writ petitions filed before the  High Court are allowed to the extent what we have  held in  this judgment and directions issued hereinafter.   Civil appeal  Nos.   6218-23/1995  are  dismissed.   The  relevant assessment  orders if impugned in these cases are set aside. We  direct the respondents to assess the appellants and  the petitioners  for the relevant years involved in these  cases only  in accordance with the principles of law laid down  in this judgment.  There shall be no order as to costs.