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The Commissioner, Trade Tax, U.P, Lucknow v. M/S, Jamuna Prakash Jaiswal.
Factual and Procedural Background
This revision under Section 11 of the U.P. Trade Tax Act challenges the Tribunal's order dated 30 May 1996 concerning Assessment Year 1987-88. Assessment proceedings were initiated on information that the assessee had received amounts from M/s IFFCO, Phulpur, Allahabad and M/s BPCL, Naini, Allahabad as hire charges for buses. The assessing authority treated those receipts as taxable under Section 3-F of the Act and levied tax. The assessee produced agreements and explained that buses were provided only for transporting the companies' employees while possession and all running expenses (diesel, driver/conductor salary, road tax, passenger tax, etc.) remained with the assessee, and therefore there was no transfer of the right to use the buses. The assessing authority rejected the plea; the assessee's appeal to the Assistant Commissioner (Judicial), Trade Tax was dismissed; the assessee then appealed to the Tribunal which allowed the appeal (the impugned order). The present revision seeks to challenge the Tribunal's order. The court heard learned Standing Counsel for the State and counsel for the assessee.
Legal Issues Presented
- Whether the amounts received by the assessee from M/s IFFCO and M/s BPCL as "hire charges" involved a transfer of the right to use the buses such that they are taxable under Section 3-F of the U.P. Trade Tax Act.
Arguments of the Parties
State / Revenue (Learned Standing Counsel)
- The agreements required the assessee to provide vehicles to the companies and the sums received were hiring charges liable to tax under Section 3-F.
- Because, under the agreements, the assessee transported the employees of the companies, the vehicles were effectively for the companies' use and Section 3-F applies.
Assessee (Learned Counsel for the Assessee)
- The assessee provided vehicles only for transporting the companies' employees at stipulated charges; there was no transfer of the right to use the buses.
- Possession and control of the vehicles remained with the assessee; all running expenses (diesel, driver/conductor salary, taxes, permits, insurance, etc.) were borne by the assessee.
- The entire transit risk remained with the assessee and the companies were not given effective control of the vehicles; therefore, Section 3-F is not attracted.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Kando Transport v. S.T.O. Assessment Unit, Barbil ((1992) 43 STL 67) (Orissa) | The determinative factor for a transaction being a sale is whether a transfer of the right of user is involved; if control, custody and possession remain with the owner, no transfer of right to use is involved despite hire charges. | The court relied on this principle to emphasise that transfer of effective control (control, custody, possession) is essential before Section 3-F can apply; used to support finding that no transfer occurred here. |
| Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer, Company Circle, Visakhapatnam ((1990) 77 STC 182) (Andhra Pradesh High Court) | Where the effective control of machinery remained with the owner and the contractor was not free to use the machinery for other works or move it, there was no transfer of the right to use; hire charges were not exigible to sales tax. Delivery of possession must be distinguished from custody; passage of control over economic benefits is core to transfer. | The court cited this decision for the proposition that mere use by another does not amount to transfer of the right to use if effective control remains with the supplier; applied that ratio to conclude Section 3-F not attracted in the present facts. |
| State of Andhra Pradesh v. Rashtriya Ispat Nigam Limited (JT 2002 (2) SC 493 : (2002) 3 SCC 314 : AIR 2002 SC 1305) | The Supreme Court affirmed the High Court's conclusion that the transactions did not involve transfer of the right to use machinery where effective control remained with the owner; consequently hire charges were not taxable under the relevant provision. | The court relied on the Supreme Court's affirmation to reinforce that effective control remaining with the owner excludes applicability of the provision taxing transfer of right to use; this binding authority supported dismissal of the revision. |
| Ahuja Goods Agency v. State of U.P. (1997 NTN (Vol. 11), 484) | Where trucks remained in the custody of drivers employed by the owners, transit risk remained with the transporter and the user (distillery) could use the vehicle only for specified purposes, there was no transfer of possession and hence no transfer of right to use goods under Section 3-F. | This Court's Division Bench decision was applied as a local precedent demonstrating that facts showing custody/possession and transit risk remaining with the transporter negate transfer of right to use; used to support the present outcome. |
| Corpus Juris Secundum, Vol. 87 p. 892 (textual authority cited in Rashtriya Ispat Nigam case) | Emphasises that the essence of transfer is passage of control over the economic benefits of property; delivery of possession is necessary to effect transfer of right to use and must be distinguished from mere custody. | Cited in the earlier High Court decision and relied upon indirectly in the present reasoning to underscore that transfer requires passing effective control and possession, not mere use under conditions. |
Court's Reasoning and Analysis
The court began by construing Section 3-F of the Act, noting that the provision applies only where there is a transfer of the right to use goods. The court then examined the factual matrix and relevant clauses of the agreements between the assessee and the two companies (IFFCO and BPCL) to determine whether an effective transfer of control had taken place.
Key factual findings drawn from the agreements (as specifically quoted and considered) included:
- The assessee was required to place specified buses at the disposal of the companies for transporting their employees, but the terms made clear that the assessee would ensure availability of drivers, spare tyres, tools and that vehicles could be spared only for limited servicing periods with substitute vehicles to be provided by the assessee.
- The entire running and maintenance costs (diesel/petrol, salary/overtime of staff, insurance, taxes, permits, route permits, parking/garaging, etc.) were to be borne by the assessee; the companies disclaimed responsibility for such expenses.
- The agreements contained clauses permitting the companies to impose penalties for failure to provide substitute vehicles or for improper use, and reserved rights such as contract termination, but did not transfer custody or effective control of the buses to the companies.
- The BPCL contract required insurance and approved substitutes but repeatedly assigned responsibility for upkeep, permits and taxes to the transporter (assessee) and stated that the company would not be responsible for wear and tear or loss/damage.
The court analysed these clauses in light of the precedents. It applied the consistent ratio from the cited authorities — that the essential element for invoking the tax provision is a transfer of effective control (possession/custody/control over economic benefits) — and found those elements absent. The court emphasised that bearing running costs, retaining possession and control, and retaining transit risk point against a transfer of the right to use.
Although some clauses required operation "as per directives" of company representatives or permitted the company to fix routes and timings, the court concluded these operational stipulations did not amount to transfer of effective control or custody sufficient to invoke Section 3-F given the broader contractual allocation of possession, responsibility and risk to the assessee.
Holding and Implications
Holding: The court concluded that there was no transfer of the right to use the buses by the assessee to M/s IFFCO or M/s BPCL and therefore the provisions of Section 3-F of the U.P. Trade Tax Act did not apply. Consequently, the court dismissed the revision and upheld the Tribunal's order allowing the assessee's appeal.
Implications:
- Direct effect: The Tribunal's order in favour of the assessee stands; the amounts received as hire charges for providing buses to the two companies are not taxable under Section 3-F on the facts and terms of the agreements considered.
- Broader implication: The court applied established ratio from prior decisions (including the Supreme Court affirmation) that to attract a provision taxing the transfer of the right to use goods, there must be a transfer of effective control/possession; because the opinion relies on existing precedents and the application of their ratios to the agreements in question, it does not purport to lay down a new principle or depart from precedent.
Result: Revision dismissed.
1. Present revision under Section 11 of U.P Trade Tax Act (hereinafter referred to as “Act”) is directed against the order of Tribunal dated 30th May, 1996 relating to the Assessment Year 1987-88.
2. On the basis of the information that the assessee opposite party (hereinafter referred to as “the assessee”) has received certain amount from M/S IFFCO, Phulpur, Allahabad and M/S BPCL, Naini, Allahabad towards hire charges, assessment proceedings have been initiated. During the course of the assessment proceeding, the assessee filed the copies of the agreement and explained that in pursuance of the agreement only buses were provided to M/S IFFCO, Phulpur, Allahabad and M/S BPCL, Naini, Allahabad for the transportation of their employees from their residence to the factory and from factory to the residence and for which charges were stipulated. It was submitted that the possession of the vehicle was always with him and the entire expenses, namely, diesel charges, salary of driver/conductor, road tax, passenger tax etc have been borne by it and at no stage the right has been transferred to the aforesaid two companies to use the buses and thus, the assessee was not liable to tax under Section 3-F of the Act. The assessing authority has not accepted the plea of the assessee and levied the tax on the amount received from the aforesaid two companies under Section’ 3-F of the Act. Aggrieved by the assessment order, the assessee filed appeal before the Assistant Commissioner (Judicial), Trade Tax which was dismissed. The assessee filed appeal before the Tribunal that has been allowed by the impugned order. Heard learned Standing Counsel and Sri Kunwar Saksena, learned counsel appearing on behalf of the assessee.
3. Learned Standing Counsel submitted that the order of the Tribunal is erroneous. He submitted that as per the agreement, the assessee had to provide the vehicles to the aforesaid two companies and whatever charges have been received were the hiring charges liable to tax under Section 3-F of the Act. He submitted that since under the agreement, the assessee had to transport the employees of the companies at the material time, the said vehicles were for the use of the companies only and, therefore, the provisions of Section 3-F of the Act is applicable.
4. Learned counsel for the assessee filed copies of the agreement with the aforesaid two companies that are on record. He submitted that, as per the agreement, the assessee has only provided the vehicles to the aforesaid two companies for transportation of their employees from their residence to the factory and from factory to their residence at a stipulated amount. He submitted that at no stage, there was transfer of right to use the buses to the aforesaid two companies. He submitted that the entire expenses relating to the running of the buses, namely, diesel charges, salary of driver/conductors, road tax, passenger tax etc have been borne by the assessee and the possession and control of the buses were always with the assessee. He submitted that the entire transit risk was of the assessee and not of the companies. On these facts, he submitted that the effective control of the vehicle has never been with the aforesaid two companies and, therefore, the provisions of Section 3-F of the Act does not apply. Section 3-F of the Act reads as follows:
“Section 3-F, Rate of tax on the right to use any goods or goods involved in the execution of a works contract.
Notwithstanding anything contained in Section 3-A, or Section 3-AAA or Section 3-D, the turnover relating to the business of transfer of the right to use any goods for any purpose or of transfer of the property in goods involved in the execution of a works contract shall be determined in the manner prescribed and shall be liable to tax at such rate not exceeding fifteen percent, as the State Government may, by notification, declare, and different rates may be declared for different goods or different classes of dealers.”
5. The bare perusal of Section 3-F of the Act shows that the provision of Section 3-F is applicable only in cases where there is transfer of right to use the goods.
6. Similar question came up for consideration in Kando Transport v. S.T.O Assessment Unit, Barbil, (1992) 43 STL 67 Orissa. In this case also the petitioner entered into a contract with M/s Minerals & Metals Trading Corporation of India Ltd. for transportation work including loading, unloading and stacking. The contention of the transporter was that there was no transaction of sale and that the contract was for purely labour and service. The department, however, contended that “hire charges” received by the transporter come within the definition of “sale price”. Considering the enlarged definition of ‘sale’ in view of the Constitutional amendment, the Orissa High Court held as follows:
“In order to decide whether a transaction is of sale the determinative factor is whether transfer of right of user is involved. By way of illustration we may indicate that if ‘A’ al lows his vehicle to be used by B for a consideration, and the vehicle is placed-at the control, custody and possession of ‘B’ it may be a case of transfer of the right to use the vehicle for any purpose. Where, however, the control, custody, and possession over the vehicle remains with ‘A’, notwithstanding the fact that certain amounts were received as hire charges, no transfer of the right to use is involved.”
7. In Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer, Company Circle, Visakhapatnam, (1990) 77 STC 182, Andhra Pradesh, the petitioner which owned the Visakhapatnam Steel Project, for the purpose of the steel project, allotted different parts of the project work to contractors. To facilitate the execution of work by the contractors with the use of sophisticated machinery, the petitioner had undertaken to supply the machinery to the contractors for the purpose of being used in the execution of the contracted works of the petitioner and received charges for the same, The respondents made a provisional assessment in view of the enlarged definition of sale. Then the Andhra Pradesh High Court held-that under the agreement, the effective control of the machinery, even while the machinery was in the use of the contractor, was that of petitioner company. The contractor was not free to make use of the same for other works or move it out during the period the machinery was in his use. Therefore, the contractor was entitled to make use of the machinery for purpose of execution of the works of the petitioner and’ there was no transfer of the right to use it asrstich in favour of the contractor. This is how the Court held that the hire charges collected by the petitioner from the contractors were not exigible to sales tax. To come to this conclusion, the Andhra Pradesh High Court relied on Corpus Juris Secondum, Vol. 87 page 892 which emphasised that the essence of transfer is passage of control over the economic benefits of property which results in terminating rights and over relations in one entity and creating them in another. While construing the word “transfer” due regard must be had to the thing to be transferred. A transfer of the right to use the goods necessarily involves delivery of possession by the transfer to the transferee. Delivery of possession of a thing must be distinguished from its custody. It is not uncommon to find the transferee of goods in possession while transferor is having custody.
8. Against the aforesaid decision of the Andhra Pradesh High;Court, the State of Andhra Pradesh filed Special Leave Petition before the Apex Court in the case of State of Andhra Pradesh v. Rashtriya Ispat Nigam Limited reported in JT 2002 (2) SC 493 : ((2002) 3 SCC 314 : AIR 2002 SC 1305). Apex Court had affirmed the order of the Andhra Pradesh High Court and held as fol lows:
“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 contractor 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.”
9. A similar question came up for consideration before the Division Bench of this Court in the case of Ahuja Goods Agency v. State of U.P, reported in 1997 NTN (Vol. 11), 484. Petitioner received transportation charges from a distillery in connection with the transportation of Indian made Foreign liquor from the distillery to various Government bonded warehouses. Question for consideration was whether the transportation charges was liable to tax under Section 3-F of the Act. The contention of the petitioner was that the transportation charges were paid for service under the agreement and there was no transfer of right to use the vehicle. The Division Bench examined the agreement and held that the truck to be used for carrying the goods will continue to remain in the custody of the drivers employed by the owners of the trucks. The distillery could have used the vehicle only for the purpose specified goods and not for any other purposes. The transit risk was of the petitioner and not of the distillery. It was the duty of the transporter to abide by all the laws relating to the motor vehicle and the excise. From theses factors, it is manifest that there was no transfer of possession even of the vehicle, which were being used for carrying the goods. On these facts Division Bench held that in the absence of transfer of possession of vehicle there was no transfer of right to use the goods and the provisions of Section 3-F of the Act shall not be applicable.
10. In view of the ratio laid down by the aforesaid decisions of the High Court and the Apex Court, it is clear that for the transfer of right to use the goods and to invoke the provision of Section 3-F of the Act. it is necessary that there should be transfer of effective control of the goods in favour of the party.
11. It is relevant to refer some of the clauses of the agreement, which has also been referred in the order of the Tribunal to adjudicate the issue whether in the present case, there was any transfer of effective control of the buses by the assessee to the aforesaid two companies. The relevant extract of letter of M/s. IFFCO, Phulpur, Allahabad is as follows:
“You will place at the disposal of IFFCO one 50/52 seater bus model 1987. This will be used for transportation or of man and material of IFFCO and will be run as per directives of representatives of IFFCO. Generally the vehicle will run between Phulpur and Allahabad but some times it may be required to go outside Allahabad also. In such cases, you will arrange route permit for that destination. IFFCO will reimburse the charge for route permit when presents with monthly bill.
You will ensure availability of driver, in good condition spare tyres, tools and other necessary items and ensure that the vehicle is available for use every time.
The vehicle can be spared with prior approval for periodical check up, servicing and maintenance etc. for a maximum of one day in a month subject to the substitute vehicle of similar standard/capacity being made available by you during this period. In case you fail to provide substitute vehicle IFFCO will impose penalty @ Rs. 500/250 per day on you for the absent period. In case it is found that engaged vehicle Is used outside, the penalty may extend upto Rs. 1000/- for Bus and:Rs: 500/- for standard/Car/Jeep per day.
Payment shall be made on the following rates:—
(a) Lump-sum rate for first 2500 Kms. In any month Rs. 15.000/-
(b) Rate for distance beyond 2500 Kms. In a month Rs
(c) Rate per Km. Rs. 2.90 Per Km.
(d) Over time charges for driver after normal, dutyjof 12 hours If officially detained inside or outside the factory premises Rs… Per hour.—
(e) Night halt charges while on official duty Rs… Per night.
In the event of upward revision in the price of Diesel/Petrol Oil by Government compensation on the base consumption of one 4/10 Kms. will be payable w.e.f 1-7-1987.
The entire running and maintenance cost including the cost of diesel/petrol payment of salary and overtime allowance to driver, insurance, taxes, permits etc. will be borne by you.
Payment will be made only for distance from starting points of bus to Plant site and back to termination point. No payment will be made for the distance from or upto garage.
IFFCO reserves the right to terminate the contract without assigning any reason what soever. In the event of such ‘termination, you will not be entitled for any compensation from IFFCO.
If any gross short comings/defects/neg ligence is found in the proper running of hired vehicle or its substitute, IFFCO will deduct a fixed amount from your running bills as a penalty. The amount to be fixed will be at the sole discretion of IFFCO and cannot be guaranteed.”
12. The relevant extract of letter qf. BPCL, Naini, Allahabad is as follows:
“That the transporter will run three buses 50/52 seater as per details given :below in good running condition for transporting the employees of Bharat Pumps & Compressors Ltd. from various routes as indicated below to Bharat Pumps & Compressors Ltd. and back. That in case of the above vehicle being out of order, the transporter shall pro vide an alternative/substitute vehicle after due approval of such vehicle by: the Com pany for such period as the Company thinks reasonable, (i) UGV 153 A and B shifts (ii) UGV 181 one shift (fit) UGH 565 A and B shifts.
That the buses will be operated in different shifts as mentioned above as per the timings fixed from time to time from various routes to Bharat Pumps & Compressors Ltd., Naini, and back.
That the buses will pick-up/drop company's employees from different pick-up points and routes to be mutually-’ agreed upon between the parties referred afrove and fixed from time to time.
That the buses must be duly insured under Motor Vehicles Act to cover the passengers travelling.
That in consideration of the above services to be rendered by the transporter, M/s. Bharat Pumps & Compressors Ltd., shall pay a sum of Rs. 34768.00 (Rupees Thirty four thousand seven hundred sixty eight) only per month, as uffder payable monthly after rendering actual'services. (i) UGV 153 Rs. 12940/- per month (li) UGH 565 Rs. 12940/- per month (iii) UGVI81 Rs. 7,8888/- per month. In case of any rise in the rates of fuel by any Govt, notification/below 20 n.p will not be entertained and above 20 n.p the extra cost will be paid to the contractor based on actual consumption of fuel per month.
That in case for any reason, whatsoever, the transporter fails to provide the said buses and/or is unable to transport the employees of Bharat Pumps & Compressors Ltd, on any day/trip, as the case may be, in addition to proportions to recovery of hire charges, he shall have to pay by way of liquidated damage a sum equal tq double the hire charges for that day/trip.
That the responsibility of keeping the ve hicles in good running condition as also to bear the cost of fuel etc., including the sal ary and wages of the staff employed by the transporter and Bharat Pumps & Compres sors Ltd., will in no way be responsible to pay any part of such expenditure :as men tioned hereinbefore.
That the transporter shall obtain the route permit etc. for running these buses and M/S Bharat Pumps & Compressors Ltd., shall in no way be responsible for ob taining such permit etc. payment of taxes such as passenger tax. surcharge. Insurance charges, to concerned authorities will be the liability of the contractor and Bharat Pumps & Compressors Ltd. will in no way be re sponsible to pay any part of such taxes. The contractor will have to produce the above documents, as and when required by the authorised officer of Bharat Pumps & Com pressors Ltd.
That the transporter will arrange at his own cost for the parking and garaging of the buses at Allahabad, or any other place the transporter may like to garage and keep the bus. But on the outward journey to the factory site of Bharat Pumps & Compressors Ltd., the bus will be allowed to be parked in the open ground for the period it is necessary to park and some for fulfilment of this contract.
That Bharat Pumps & Compressors Ltd. shall not be liable for wear and tear, maintenance or loss or damage to the bus while in use or while garaged or parked.”
13. Perusal of the aforesaid terms of the contracts shows that the effective control of the buses have never been transferred to the aforesaid two companies and it always remain with the assessee. The assessee only provided the buses for transportation of employees of the companies from one place to another place and the price was stipulated only for the purposes of transportation and not for the leasing of the entire bus as such for a definite period. The entire expenses for running of the buses, namely, diesel charges, salary of driver/conductor, road tax, passenger tax etc. are to be borne by the assessee. In this view of the matter, am of the opinion that there was no transfer of right to use the vehicles by the assessee to the aforesaid two companies and the provision of Section 3-F of the Act is not applicable. The order of the Tribunal is upheld. In the result, revision fails and is, accordingly, dismissed.
14. Revision dismissed.
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