2002 JTR(SC) 314
2002 AIR(SC) 1305 ; 2002 AIR(SCW) 1118 ; 2002 2 ALD(SC) 124 ; 2014 44 GST 591 ; 2002 2 JT 493 ; 2002 26 MTJ 479 ; 2002 2 Scale 466 ; 2002 3 SCC 314 ; 2002 126 STC 114 ; 2013 31 STR 513 ; 2002 2 Supreme 221
2002(2) Supreme 221
SUPREME COURT OF INDIA
(From Andhra Pradesh High Court)
Shivaraj V. Patil and Bisheshwar Prasad Singh, JJ.
State of Andhra Pradesh & Anr. -Appellants
versus
M/s. Rashtriya Ispat Nigam Ltd. -Respondent
Civil Appeal No. 31 of 1991
Decided on 6-3-2002
Counsel for the Parties :
For the Appellants : G. Prabhakar, Advocate.
For the Respondent : S. Ganesh, Sr. Advocate, P.S. Sudheer, Advocate for K.J. John, Advocate.
IMPORTANT POINT
Under the terms and conditions of the agreement between respondent and contractor, there was no transfer of right to use the machinery in favour of the contractor hence its hire charges cannot be taxed under Section 5E of A.P. General Sales Tax Act, 1957.
Act
Referred
:ANDHRA PRADESH GENERAL SALES TAX ACT : S.5(e)
CONSTITUTION OF INDIA : Art.366(2)(9)(a)(d)
(A) The transaction in question is evaluated under Section 5-E of The Andhra Pradesh General Sales Tax Act, 1957, read in conjunction with the interpretive framework of the Constitution of India. Section 5-E mandates a tax on the total amount realized from transferring the right to use goods, whether for a specified period or otherwise, provided the dealer is engaged in such business and the aggregate exceeds the Rs. 1,00,000 threshold. The constitutional provisions provide the interpretive backdrop for determining the nature of the transaction. The critical inquiry is whether the arrangement constitutes a transfer of the right to use goods, which would trigger the tax, or whether it remains a mere bailment or custody agreement, which would not.
(B) The core legal principle is that liability under Section 5-E arises only upon a transfer of the right to use goods. The essence of such a transfer is the passing of control and the ability of the recipient to utilize the goods for purposes beyond the specific contractual engagement. Effective possession, control, and freedom of use by the recipient are determinative factors. If the supplier retains effective control and the goods are merely made available for a specific project or purpose, the transaction does not meet the statutory requirement of a transfer of right to use.
Facts of the case:
The respondent owned machinery used for a steel project and allotted works to contractors. The respondent supplied sophisticated machinery to the contractors for executing the contracted works and collected hire charges. The appellant imposed a provisional assessment for sales tax on these hire charges under Section 5-E of the Act. The respondent challenged the levy, arguing no transfer of right to use occurred. The High Court examined the agreement's clauses and found the machinery remained under the effective control and possession of the respondent, with restrictions preventing the contractors from using it for other works or moving it away.
Findings of Court:
The High Court concluded that the transaction did not involve a transfer of the right to use the machinery. The agreement's clauses demonstrated that the respondent retained effective possession and control; the contractors were not free to use the machinery outside the project or remove it. This finding was supported by prior orders from the Appellate Deputy Commissioner. The court held that the essential requirement of Section 5-Ea transfer of right to usewas not satisfied, rendering the hire charges non-taxable.
Issues:
Whether the hire charges collected by the respondent for supplying machinery to contractors constitute a transfer of the right to use goods within the meaning of Section 5-E of The Andhra Pradesh General Sales Tax Act, 1957.
Ratio Decidendi:
The liability under Section 5-E is contingent on the transfer of the right to use goods. Since the agreement demonstrated retained control, restricted usage, and no freedom for the contractors, the transaction was a bailment or custody, not a transfer of right to use. Consequently, the hire charges were not liable to sales tax.
Result:
The appeal is dismissed with costs to the parties.
(A) The transaction in question is evaluated under Section 5-E of The Andhra Pradesh General Sales Tax Act, 1957, read in conjunction with the interpretive framework of the Constitution of India. Section 5-E mandates a tax on the total amount realized from transferring the right to use goods, whether for a specified period or otherwise, provided the dealer is engaged in such business and the aggregate exceeds the Rs. 1,00,000 threshold. The constitutional provisions provide the interpretive backdrop for determining the nature of the transaction. The critical inquiry is whether the arrangement constitutes a transfer of the right to use goods, which would trigger the tax, or whether it remains a mere bailment or custody agreement, which would not.
(B) The core legal principle is that liability under Section 5-E arises only upon a transfer of the right to use goods. The essence of such a transfer is the passing of control and the ability of the recipient to utilize the goods for purposes beyond the specific contractual engagement. Effective possession, control, and freedom of use by the recipient are determinative factors. If the supplier retains effective control and the goods are merely made available for a specific project or purpose, the transaction does not meet the statutory requirement of a transfer of right to use.
Facts of the case:
The respondent owned machinery used for a steel project and allotted works to contractors. The respondent supplied sophisticated machinery to the contractors for executing the contracted works and collected hire charges. The appellant imposed a provisional assessment for sales tax on these hire charges under Section 5-E of the Act. The respondent challenged the levy, arguing no transfer of right to use occurred. The High Court examined the agreement's clauses and found the machinery remained under the effective control and possession of the respondent, with restrictions preventing the contractors from using it for other works or moving it away.
Findings of Court:
The High Court concluded that the transaction did not involve a transfer of the right to use the machinery. The agreement's clauses demonstrated that the respondent retained effective possession and control; the contractors were not free to use the machinery outside the project or remove it. This finding was supported by prior orders from the Appellate Deputy Commissioner. The court held that the essential requirement of Section 5-Ea transfer of right to usewas not satisfied, rendering the hire charges non-taxable.
Issues:
Whether the hire charges collected by the respondent for supplying machinery to contractors constitute a transfer of the right to use goods within the meaning of Section 5-E of The Andhra Pradesh General Sales Tax Act, 1957.
Ratio Decidendi:
The liability under Section 5-E is contingent on the transfer of the right to use goods. Since the agreement demonstrated retained control, restricted usage, and no freedom for the contractors, the transaction was a bailment or custody, not a transfer of right to use. Consequently, the hire charges were not liable to sales tax.
Result:
The appeal is dismissed with costs to the parties.
JUDGMENT
Shivaraj V. Patil, J.-The only point urged by the learned counsel for the appellants before us is that there was a transfer of right to use the machinery by the respondent in favour of the contractors by collecting hire charges looking to the clauses contained in the agreement. As such it was liable to pay sales tax under Section 5-E of The Andhra Pradesh General Sales Tax Act, 1957 (for short the Act ). On behalf of the respondent, the learned senior counsel made submissions supporting the impugned order pointing out to the various clauses contained in the agreement.
2. Section 5-E reads:-
"5-E. Tax on the amount realized in respect of any right to use goods-
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 licencee for cash, deferred payment or other valuable consideration, in the course of his business shall, on the total amount realised or realisable by him by way of payment in cash or otherwise on such transfer or transfers of the right to use such goods from the lessee or licencee, pay a tax at the rate of five paise in every rupee of the aggregate of such amount realized or realisable by him during the year:
Provided that no such tax shall be levied if the total turnover of the dealer including such aggregate is less than Rs. 1,00,000/-. (Emphasis supplied)
3. The respondent is owning Visakhapatnam Steel Project. For the purpose of steel project, it allotted different works to contractors. The respondent undertook to supply sophisticated machinery to the contractors for the purpose of being used in execution of the contracted works and received charges for the same. The appellant made provisional assessment levying tax on hire charges under Section 5-E of the Act. The respondent filed writ petition seeking declaration that the tax levied, exercising power under Section 5-E of the Act on the hire charges collected during the period 1988-89, was illegal and unconstitutional. The appellant filed a counter affidavit in the writ petition contending that the respondent was lending highly sophisticated and valuable imported machinery to the contractors engaged in the execution of the project work on specified hire charges; the machinery was given in the possession of the contractor and he was responsible for any loss or damage to it and in view of the terms and conditions contained in the agreement, there was transfer of property in goods for use and on the amounts collected by the respondent as charges for lending machinery attracted tax liability under Section 5-E of the Act.
4. The High Court after scrutiny and close examination of the clauses contained in the agreement and looking to the agreement as a whole, in order to determine the nature of the transaction, concluded that the transactions between the respondent and contractors did not involve transfer of right to use the machinery in favour of the contractors and in the absence of satisfying the essential requirement of Section 5-E of the Act, i.e., transfer of right to use machinery, the hire charges collected by the respondent from the contractors were not exigible to sales tax. On a careful reading and analysis of the various clauses contained in the agreement and, in particular, looking to clauses 1, 5, 7, 13 and 14, it becomes clear that the transaction did not involve transfer of right to use the machinery in favour of contractors. The High Court was right in arriving at such a conclusion. In the impugned order, it is stated, and rightly so in our opinion, that the effective control of the machinery even while the machinery was in use of the contractor was that of the respondent company; the contractor was not free to make use of the machinery for the works other than the project work of the respondent or move it out during the period the machinery was in his use; the condition that the contractor would be responsible for the custody of the machinery while it was on the site did not militate against respondent s possession and control of the machinery. It may also be noticed that even the Appellate Deputy Commissioner, Kakinada in the order dated 15.11.1999 in regard to assessment years 1986-87 and 1987-88 held that under the terms and conditions of the agreement, there was no transfer of right to use the machinery in favour of the contractor. Although it cannot be said that the appellant was estopped from contending otherwise in regard to assessment year 1988-89, it is an additional factor and circumstance, which supports and stand of the respondent.
5. In our view, no fault can be found with the order under challenge. In the light of what is stated above this appeal has no merit. Consequently it is dismissed directing the parties to bear their respective costs.
(N.K.R.) Appeal dismissed.
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