By G. G. Goyal | Chartered Accountant
C. B. Thakar | Advocate
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VAT
Nature of Lease Transaction – Update in Light of Recent
Judgments
The issue whether a transaction is taxable lease transaction
under Sales Tax Law or not, is a very debatable one. It is a judgment based
issue as the term ‘Lease Transaction’ (transfer of right to use goods) is not
defined in sales tax laws. From judgments delivered so far, it can be seen that
if there is delivery of possession to client, then taxable lease transaction
takes place. On the other hand, if there is no delivery of possession, i.e., if
effective control is not transferred to client, then there is no lease
transaction. Landmark judgments on the issue are as hereunder:
Rashtriya Ispat Nigam Ltd. 126 STC 114 (SC)
In this case amongst others, the Supreme Court has held that
in order to be a lease transaction, there should be delivery of possession to
the lessee. Unless effective control is given to the party, no lease transaction
takes place. The facts in this case were that Rashtriya Ispat Nigam Limited
allowed its contractor to use its machinery for the contract being executed for
it. One of the conditions of the contract was that the contractor was not free
to use the said machinery for any other work except for the contract executed
for Rashtriya Ispat Nigam Limited. The contractor was not allowed to move the
machinery outside the project area. Under above circumstances, the Supreme Court
held that there was no delivery of possession to amount as ‘transfer of right to
use goods’. Therefore, if the use is allowed under specified circumstances,
without freedom to the user, it cannot amount to taxable lease transaction.
Bharat Sanchar Nigam Ltd. 145 STC 91 (SC)
This is the latest case from the Supreme Court in the given
series. 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 was applicable
as the transaction pertained to service. While holding so, one of the learned
judges on the Bench observed the following (Para 98 below) about taxable lease
transaction:
“98. To constitute a transaction for the transfer of the
right to use the goods the transaction must have the following attributes:
-
There must be
goods available for delivery;
-
There must be a
consensus ad idem as to the identity of the goods;
-
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;
-
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;
-
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.”
At present, reliance is placed on above paragraph to decide
on the nature of the lease transaction. Subsequent judgments, relying and
analyzing on above judgments, are also now available. Reference can be made as
hereunder:
Alpha Clays 135 STC 107 (Ker)
In this judgment, the Hon. Kerala High Court has considered
the above judgment in case of Rashtirya Ispat Nigam Ltd. (Supra).
The Kerala High Court, amongst others, observed the
hereunder:
“From all the aforesaid decisions, it is clear that in order
to attract the provisions of section 5(1)(iii) of the Act, particularly the
expressions “transfer of the right to use goods”, there must be a parting with
the possession of the goods for the limited period of its use by the assessee in
favour of the lessees. In other words, so long as effective control of the goods
is with the assessee, the rent received from the customers for use of the goods
will not attract the provisions of section 5(1)(iii) of the Act. It is in those
circumstances, it has been held by this Court in Bahulayan’s case (1992) 1 KTR
137, that the hire charges received for use of the lorry is not exigible to tax
under section 5(1)(iii) of the Act, the effective control of the lorry was
always with its owner. It is on this principle, it was held in Rohini Panicker’s
case [1997] 104 STC 498 (Ker), that lending of video cassette for use by the
customers is exigible to tax under the Act, for the possession of the video
cassette is given to the customers for their use according to their will. It is
in view of this legal position, the Supreme Court in Aggarwal Brother’s case
[1999] 113 STC 317, has held that shuttering material is exigible to tax under
law.”
Similarly, based on
BSNL, now there
are a few more judgments. Reference can be made to the following recent
judgments:
Commissioner of Sales Tax v. Rolta Computers & Industries Pvt.
Ltd. 25 VST 322 (BHC)
In this case, the transaction was that the party allotted its
computer time to certain parties on exclusive basis. The Sales Tax Department
wanted to consider the said transaction as lease transaction relating to
computers. However, the Bombay High Court rejected the above plea. The Hon.
Bombay High Court, amongst others, observed the following:
“75.In our opinion, the essence of the right under article
366(29A)(d) is that it relates to user of goods. It may be that the actual
delivery of the goods is not necessary for effecting the transfer of the right
to use the goods but the goods must be available at the time of transfer, must
be deliverable and delivered at some stage. It is assumed, at the time of
execution of any agreement to transfer the right to use, that the goods are
available and deliverable. If the goods, or what is claimed to be goods by the
respondents, are not deliverable at all by the service providers to the
subscribers, the question of the right to use those goods, would not arise.”
In light of above, the Hon. Bombay High Court has held that allowing computer time does not fall in the category of lease transaction as no delivery of computer is made to the customer at any time.
Commissioner, VAT, Trade and Taxes Department v. International Travel House Ltd. 25 VST 653 (Delhi)
In this one more recent judgment, the Hon’ble Delhi High Court has observed the following:
“13.Sub-paras (b) and (c) of para 97 are important with reference to the facts of the case to determine as to whether or not there is a sale by virtue of transfer of right to use goods as envisaged in article 366(29A)(d). The admitted position which emerges is that the transferee, namely, NDPL, has not been made available the legal right to use the goods, viz., the permissions and licences with respect to the goods. In the present case, the permissions and licences with respect of the cabs are not available to the transferee and remained in control and possession of the respondent. It is the driver of the vehicle, who keeps in his custody and control the permissions and licences with respect to the Maruti Omni Cabs or the said permissions and licenses remained in possession of the respondent. These are never transferred to M/s NDPL. It, therefore, cannot be said that there is a sale of goods by transfer of right to use the goods. It is absent, namely, the ingredient as stated in para 97(c) of the Bharat Sanchar Nigam Ltd.’s case (2006) 3 VST 95 (SC); (2006) 145 STC 91 (SC); (2006) 3 SCC 1.”
A further observation is as follows:
“We may note that it has been held in the Division Bench judgment of the Allahabad High Court in Ahuja Goods Agency v. State of Uttar Pradesh (1997) 106 STC 540, that unless specified vehicles are transferred pursuant to the contract, there is no sale of the goods. It was also held that when it is the duty of the transporter to abide by all the laws relating to motor vehicles and excise, the custody remains with the owners of the vehicles and not the persons who have hired the vehicles, and, which again shows that there is no sale. We respectfully agree with the reasoning in Ahuja Goods Agency’s case (1997) 106 STC 540 (All). In the case before us also there are no identified goods as intended in para 97(b) of the Bharat Sanchar Nigam Ltd.’s case (2006) 3 VST 95(SC); (2006) 145 STC 91 (SC); (2006) 3 SCC 1 and hence no sale of goods. We also agree with the reasoning of the judgment in Lakshmi Audio Visual Inc. v. Assistant Commissioner of Commercial Taxes (2001) 124 STC 426 (karn) wherein R. V. Raveendran, J. (as he then was) held that when there is only hiring of audio visual and multimedia equipment, which equipment is at the risk of the owner and possession and effective control remain with the owners then, in such circumstances, it cannot be said that the customer had got the right to use the equipment and there was, therefore, no deemed sale. We may note that there are other single Bench judgments of the Allahabad High Court which follow the view of the Division Bench in the Ahuja Goods Agency’s case (1997) 106 STC 540 and we need refer to only on such judgments reported as Mohd. Wasim Khan v. Commissioner of Trade Tax, U.P., Lucknow (2009) 20 VST 196(All); (2006) 30 NTN 233, in which the contracts were those to providing buses for transportation of the employees of the companies from one place to another and which transaction was held to be not a sale because the driver and other employees of the vehicles were employees of the owners, the road permit was in the names of the owners who had to take insurance for the vehicles and the workmen and consequently it was held that there was no case of transfer of the right to use the goods because the effective control of the vehicle remained with the owners of the buses.”
Thus, the concept of the nature of lease transaction gets clear from the above judgments. Whether effective control is with the client, so as to make the transaction a taxable lease transaction has to be decided in light of such judgments .
