Transfer of the Right to Use Goods in Indian Tax Jurisprudence

Transfer of the Right to Use Goods in Indian Tax Jurisprudence: Constitutional Architecture, Doctrinal Evolution and Contemporary Challenges

1  Introduction

The expression “transfer of the right to use” (hereinafter “TRU”) has been a fertile ground for constitutional contestation and statutory interpretation in India ever since the Forty-sixth Amendment inserted Article 366(29-A)(d) into the Constitution. The amendment empowered State legislatures to tax certain deemed sales, notably transfers of the right to use goods for any purpose. Over the last four decades, courts have endeavoured to delineate the precise contours of TRU, to segregate it from pure services and from other composite transactions. This article critically analyses that evolution, synthesising leading precedents such as 20th Century Finance, Bharat Sanchar Nigam Ltd. (“BSNL”), Association of Leasing & Financial Service Companies, and the twin Rashtriya Ispat Nigam decisions, and examines their continued relevance in the post–Goods and Services Tax (“GST”) era.

2  Constitutional and Statutory Framework

2.1 Article 366(29-A)(d)

Clause (d) deems “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” to be a sale of goods. It thereby shifts such transactions from the Union’s residuary competence (Entry 97, List I) to State competence under Entry 54, List II.[1]

2.2 Legislative Entries in Play

  • Entry 54, List II – tax on the sale or purchase of goods (as expanded by Art. 366(29-A)).
  • Entry 92C (pre-GST) & now the GST framework – empowering Parliament to levy service tax/GST on services.
  • Entry 97, List I – residual power, invoked where a transaction is characterised as a service rather than a deemed sale (e.g., Association of Leasing).[2]

3  Doctrinal Evolution Through Case Law

3.1 Pre-Amendment Position

Prior to 1982, States could tax only transactions amounting to a traditional sale involving transfer of title. Composite or hire-purchase arrangements were immune, following State of Madras v. Gannon Dunkerley (1958). The Forty-sixth Amendment legislatively overruled that inhibition, introducing deemed sales including TRU.

3.2 Post-Amendment Tests

The Supreme Court in 20th Century Finance Corp. crystallised the essential elements of TRU, holding that mere execution of a document is insufficient; effective control must pass to the transferee.[3] Later, BSNL distilled six cumulative attributes (availability of goods, consensus ad idem, legal right to exclusive use, for a period, with obligations arising from such use, and transferor’s inability to transfer the same rights simultaneously).[4]

4  Analysis of Key Precedents

4.1 20th Century Finance Corp. v. State of Maharashtra (2000)

The Court held that location of goods at the time of use cannot by itself confer taxing jurisdiction; what matters is the situs of the deemed sale. Importantly it emphasised “overt act” of placing goods at the disposal of the transferee as sine qua non for TRU.[3]

4.2 Bharat Sanchar Nigam Ltd. v. Union of India (2006)

Addressing telecom connectivity, the Court concluded that the dominant intent is service; electromagnetic spectrum is not “goods”. Absent delivery or exclusive right in any identifiable goods, States lacked competence to levy sales tax. The six-factor test enumerated by the Court has since become the lodestar for determining TRU.[4]

4.3 Association of Leasing & Financial Service Companies v. Union of India (2010)

Financial leasing was upheld as a service taxable by the Union under Entry 97, List I. Though leasing involves equipment, the taxable event for service tax purposes was held to be the financing activity; Article 366(29-A) was not attracted because title and possession often remain with the lessor and effective control is not invariably transferred.[2]

4.4 Rashtriya Ispat Nigam Ltd. Litigation

  • High Court (1989): Hire of machinery to contractors did not amount to TRU because the owner retained control; therefore Section 5-E APGST Act could not apply.[5]
  • Supreme Court (2002): Affirmed, stressing that factual control and contractual restrictions negate TRU.[6]

4.5 Subsequent High Court and Tribunal Decisions

Cases such as Indus Towers (Karnataka HC, 2011) and GMMCO (CESTAT, 2024) reiterate the necessity of examining contractual terms to ascertain transfer of possession and risk.[7]

5  Determinants of a Valid Transfer of Right to Use

  1. Identifiable Goods: Goods must exist and be ascertainable at the time of transfer.
  2. Consensus on Identity: Parties must agree on the specific goods.[4]
  3. Legal Right to Use: The transferee must acquire a legally enforceable right, including licences/permits.
  4. Exclusivity: For the agreed period, the right must be to the exclusion of the transferor (HLS Asia).[8]
  5. Possession & Control: Control may be physical (machinery) or juridical (trademark licences) depending on the nature of goods (Kreem Foods, Duke & Sons).[9]
  6. Consideration: Cash, deferred payment or other valuable consideration completes the taxable event.

6  Tax Competence and the Spectre of Dual Levy

The judiciary consistently resists overlapping exactions. BSNL firmly rejected the “aspect theory” when it results in concurrent sales and service tax on the same value. Bikanerwala (Delhi HC, 2017) applied the same principle in the franchise/trademark context. Post-GST, Schedule II of the CGST Act, 2017 classifies TRU of goods as a “supply of services,” effectively centralising the levy and abrogating State VAT on such transactions.[10]

7  Sector-Specific Implications

7.1 Telecommunications

BSNL shields telecom operators from State VAT, but ancillary supplies (e.g., SIM cards) may still constitute sales if separable.[4]

7.2 Equipment Leasing

Leases transferring possession (e.g., heavy machinery in GMMCO) are liable to State tax pre-GST and now GST (as services). Pure financial leases without transfer of effective control fall under service tax/GST on financial services (Association of Leasing).[2]

7.3 Intellectual Property & Franchising

High Courts in Duke & Sons, Kreem Foods and McDonalds/Bikanerwala recognise that trademark licences constitute TRU notwithstanding simultaneous licences to multiple users; physical delivery is unnecessary, demonstrating the goods-specific character of control requirements.[9]

8  Relevance in the GST Era

GST subsumes State VAT on deemed sales and Union service tax. Schedule II classifies “any transfer of the right to use any goods for any purpose for a consideration” as a supply of service, thereby avoiding the earlier dichotomy. Nonetheless, legacy disputes under pre-GST laws persist, and the jurisprudential tests elucidated above remain instructive for characterising supplies under GST (e.g., to distinguish transfer of right in goods – supply of goods – from right to use – supply of services).

9  Conclusion

The Indian judiciary has developed a nuanced, fact-sensitive doctrine to demarcate TRU transactions. The touchstone remains the transfer of effective control and exclusion. While GST ostensibly harmonises the levy, the underlying principles retain vitality for classification, valuation, and input-tax-credit disputes. Future litigation is likely to pivot on whether control and risk transfer amount to “transfer of right in goods” (goods supply) or only “right to use” (service supply). The deep doctrinal foundations laid in 20th Century Finance and BSNL will thus continue to inform judicial reasoning in the evolving indirect tax landscape.

Footnotes

  1. Constitution of India, Art. 366(29-A)(d).
  2. Association of Leasing & Financial Service Companies v. Union of India, (2011) 2 SCC 352.
  3. 20th Century Finance Corp. v. State of Maharashtra, (2000) 6 SCC 12.
  4. Bharat Sanchar Nigam Ltd. v. Union of India, (2006) 3 SCC 1.
  5. Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer, 1989 SCC OnLine AP 413.
  6. State of A.P. v. Rashtriya Ispat Nigam Ltd., (2002) 3 SCC 314.
  7. Indus Towers Ltd. v. Deputy CCT, Karnataka HC (2011); GMMCO Ltd. v. CST, CESTAT (2024).
  8. HLS Asia Ltd. v. State of Tripura, Gauhati HC (2011).
  9. Kreem Foods Pvt. Ltd. v. State of Kerala, Kerala HC (2008); Commissioner of Sales Tax v. Duke & Sons Pvt. Ltd., Bombay HC (1998).
  10. Central Goods and Services Tax Act, 2017, Schedule II, para 5(f) & 1(b).