Introduction By deeming clause in
Article 366 (29-A) of the Constitution, the transaction of “Transfer of
Right to Use Goods” (Lease transaction) are made taxable under Sales Tax
Laws. The nature of lease transaction is not defined in the
Constitution or in any Act. The interpretation is done in light of
various judicial pronouncements.
Important judgment on interpretation on nature of lease transaction
Though there are several judgments, reference can be made to the followings:
Bharat Sanchar Nigam Ltd .(145 STC 91)(SC)
The
issue in this case was about levy of lease tax on services provided by
Telephone Companies. The Supreme Court held that no sales tax is
applicable as the transaction pertains to service. While holding so, one
of the learned judges on the Bench, observed as under in para 98 about
taxable lease transactions:
“98. To constitute a transaction for
the transfer of the right to use the goods the transaction must have
the following attributes:
a. There must be goods available for delivery;
b. There must be a consensus ad idem as to the identity of the goods;
c.
The transferee should have a legal right to use the goods –
consequently all legal consequences of such use including any
permissions or licenses required therefore should be available to the
transferee;
d. For the period during which the transferee has such
legal right, it has to be the exclusion to the transferor – this is the
necessary concomitant of the plain language of the statute – viz. a
“transfer of the right to use” and not merely a licence to use the
goods;
e. Having transferred the right to use the goods during the
period for which it is to be transferred, the owner cannot again
transfer the same rights to others.”
Based on above parameters,
there are further judgments at various forums where the nature of lease
transaction is decided. Reference can be made to following judgments:-
Smokin’ Joe’s Pizza Pvt. Ltd . (A 25 of 2004 dt.25.11.08)(MSTT)
The
facts in this case were that the dealer was holding the registered
Trade mark “Smokin’Joe’s” and allowed its use to its franchisees. The
franchise agreement provided for non exclusive right to use the
registered Trade mark. The agreement also provided for providing various
services to Franchisee. The lower authorities held the transaction as
taxable lease transaction. The Tribunal held that it is not a lease
transaction as it is not exclusive. This judgment is now before the
Bombay High Court by way of Reference.
Malabar Gold Pvt. Ltd . vs. Commercial Tax Officer, Kozhikode (58 VST191)(Ker)
This
judgment is of the Kerala High Court. In this case also, the
transaction was about granting of franchise right on non-exclusive
basis. The Hon. High Court has held that when the grant of franchise is
non exclusive it is not lease transaction and not liable to VAT.
On the other hand, there are a few contrary judgments as discussed below:
Nutrine
Confectionery Co. Pvt. Ltd. vs. State of Andhra Pradesh (40 VST
327)(A.P). In this case, the transaction was for allowing use of the
trade mark. The said use was also on non-exclusive basis. Still, the
Hon. A.P. High Court has held that the transaction is a lease
transaction. The Hon. High Court felt that the judgment of BSNL about
exclusive use cannot apply in relation to intangible goods like trade
mark.
Latest Judgment of THE Hon. Bombay High Court
Latest
in the series, there is a judgment from the Bombay High Court in case
of Tata Sons Ltd. vs. State of Maharashtra (W.P.No.2818 of 2012 with
Notice of Motion (L) No.214 of 2013 dt.20.01.2015).
In this
case, the use of brand name was allowed on nonexclusive basis. Before
the Hon. Tribunal, judgments including in case of Smokin’ Joe’s was
relied upon for nonliability. However, the Tribunal has confirmed the
liability. Therefore, this matter came up, before the Hon. Bombay High
Court, on behalf of the assessee. After referring the facts and various
judgments including in case of BSNL, the Hon. Bombay High Court has held
that even if use of right is given on non-exclusive basis, still it
will be a lease transaction. The observations of the Hon. Bombay High
Court are as under:
“50. Para 98 is relied upon by Mr. Chinoy.
However, that cannot be read in isolation and out of context. It must be
read in the backdrop of the underlying controversy, namely,
relationship between a telephone connection service provider and its
customer. Such a transaction is essentially of service.
51. It
is in relation to such a controversy that the observations, findings and
conclusions must be confined. We do not see as to how they can be
extended and in the facts and circumstances of the present case to the
enactment that we are dealing with. Going by the plain and unambiguous
language of the Act of 1985, we cannot read into it the element of
exclusivity and a transfer contemplated therein to be unconditional.
Therefore, the tests in para (d) and (e) cannot be read in the Act of
1985. 58. We are of the opinion that the Tribunal did not act perversely
or committed an error apparent on the face of record in rejecting the
petitioner’s appeals. May be the Tribunal could have rendered a detailed
finding and conclusion. However, upon perusal of the order passed by
the Tribunal we find that it referred to the facts. It has also adverted
to the contentions of the parties. It also referred to its own
conclusions rendered in the case of M/s. Smokin’ Joe’s etc. However, it
concludes that the facts and circumstances in the present case are not
identical to the cases dealt with by it and of the above franchisees. We
do not express any opinion as to whether the Tribunal’s conclusions in
the case of M/s. Smokin’ Joe’s (supra) and M/s. Diageo India (supra) are
accurate or correct. We are informed that separate proceedings in that
regard are pending in this Court. However, the Tribunal did not err in
holding that the cases which have been dealt with by it including the
Supreme Court judgment in the case of BSNL (supra) are on distinct
facts.”
Conclusion
Thus, the controversy is
increasing day by day. There is uncertainty in the mind of assessees as
to which is the correct tax applicable, whether service tax or VAT. In
fact, this has led to double taxation ultimately resulting in enhanced
cost to the assessees and correspondingly to the consumers. It is
expected that finality be brought to the above burning issue either by
legislative interference or by judgment of the Hon. Supreme Court.
