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First Leasing Company Of India Ltd. v. State Of Kerala
Factual and Procedural Background
The petitioner is a company headquartered in Chennai engaged in leasing equipment on a rental basis and selling goods under hire purchase schemes, with operations across India including Kerala. The assessing officer under the Kerala General Sales Tax Act (KGST Act) assessed lease rentals and hire charges received by the petitioner in Kerala for sales tax. The petitioner filed successive appeals; the assessments were confirmed by appellate authorities up to and including the Sales Tax Appellate Tribunal. The petitioner challenged the Tribunal's final orders by filing these Tax Revision Cases in this Court.
The assessments in dispute relate to the years 1989-90 to 1991-92 and 1994-95 to 1997-98. The revisions for the first three years represent a second round of litigation: in an earlier round this Court remanded the matter to the Tribunal for reconsideration of issues after verifying facts of delivery and applying later decisions. The Court heard counsel for both sides and considered the Tribunal's orders and judgments relied upon by both parties.
Legal Issues Presented
- Whether lease rentals and hire charges received by the petitioner for leasing equipment or hire purchase transactions which result in delivery of goods in Kerala are taxable under the Kerala General Sales Tax Act (i.e., whether the levy upheld by the Tribunal was legally sustainable).
- Whether the petitioner’s transactions in the nature of lease or hire purchase are inter-State transactions (and thus not taxable in Kerala) by reason of goods being sourced from other States and consigned for delivery to lessees/hirers.
- How the Supreme Court's decision in 20th Century Finance Corporation Ltd. (119 STC 182) — particularly the principle that, where goods are not in existence at the time of agreement, the taxable event occurs on delivery of goods — applies to the factual situation before the Court.
Arguments of the Parties
Petitioner's Arguments
- The petitioner contended that tax (if any) was payable in Chennai or outside Kerala — i.e., that liability for sales tax lay in the State where lease/hire purchase agreements were executed or from where goods were consigned — and therefore challenged taxation by Kerala authorities.
- Before the Supreme Court (in separate proceedings concerning Tamil Nadu assessments) the petitioner had taken positions that (a) respondents in Tamil Nadu lacked jurisdiction if goods were not in existence at the date of agreement and only the State where goods were delivered for use could tax such transactions; and (b) respondents in Tamil Nadu lacked jurisdiction where the same transactions had already been assessed and taxed by other States and the petitioner had paid appropriate lease taxes.
- The petitioner relied on several judicial decisions (including ITC Classic Finance and Services v. Commissioner of Commercial Taxes, State of A.P v. NTPC Ltd., and Bayyana Bhimayya v. Government of A.P.) to argue that lease and hire purchase transactions were inter-State in nature because suppliers delivered goods to public carriers for ultimate delivery to lessees or hirers.
- In the factual admissions placed before the Tribunal the petitioner stated that prospective lessees identified vendors and requested the petitioner to place purchase orders; lease agreements were entered into prior to purchase; purchase orders and disbursements followed; goods were directed by petitioner to be dispatched directly to lessees in Kerala; petitioner asserted it had no place of business in Kerala during the years in question and characterized itself as a non-resident dealer.
Respondents' / State's Position (as reflected in the opinion)
- The assessing officer and appellate authorities assessed lease rentals and hire charges received in Kerala for sales tax under the KGST Act and upheld the levy. The Tribunal confirmed the assessments and noted the petitioner's inconsistent positions across States and forums.
- The State relied upon the principle that, where lease agreements are executed before goods are acquired and delivery occurs later, the taxable event for the lease transaction occurs on delivery of goods in the State where delivery is made (as per the Supreme Court decision in 20th Century Finance Corporation Ltd.).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| 20th Century Finance Corporation Ltd. v. State of Maharashtra (119 STC 182) | Where goods are not in existence at the time of agreement, or where there is an oral or implied transfer of the right to use goods, the taxable event occurs on delivery of goods (paragraph 35(d)). | The Court applied this principle to hold that lease transactions executed by the petitioner before acquiring the goods operate only on delivery of goods to the lessee; therefore the levy is triggered by delivery in Kerala. |
| Madras Credit & Investments Ltd. v. State of Kerala (134 STC 264 : (2002) 10 KTR 678) | Recognition that there are two transactions in such deals: the agreement between lessor and customer and the subsequent purchase and delivery of goods by the lessor to the customer; these are distinct for purposes of taxation. | The Court relied on this decision to treat the lease/hire transaction and the purchase/delivery transaction as separate; it held that inter-State movement of goods in the purchase does not alter the nature of the lease transaction which becomes taxable on delivery in the State of use. |
| I.T.C. Classic Finance and Services v. Commissioner of Commercial Taxes (97 STC 330) | Cited by the petitioner to support the contention that lease/hire purchase transactions were inter-State where suppliers delivered goods to public carriers for ultimate delivery to lessees/hirers. | The Court considered and rejected reliance on this authority in the factual context because the petitioner had not shown that public carriers were arranged by lessees/hirers; further, the petitioner undertook responsibility to purchase and deliver goods, so the decision did not support the petitioner's position. |
| State of A.P. v. National Thermal Power Corporation Ltd. (127 STC 280) | Cited by the petitioner as authority for inter-State nature of transactions in certain contexts. | The Court rejected the applicability of this authority to the petitioner's case for the same reasons: the arrangements and factual responsibility for purchase/delivery did not amount to inter-State lease/hire transactions exempting Kerala's levy. |
| Bayyana Bhimayya v. Government of A.P. (12 STC 147) | Cited by the petitioner to argue inter-State character of transactions. | The Court did not accept this reliance, finding the factual pattern in the petitioner's business — lease agreements entered into first, followed by purchase and delivery by the petitioner — distinguishable from the situations on which that case was relied upon. |
Court's Reasoning and Analysis
The Court's analysis proceeded in several clear steps, each based on facts admitted by the petitioner and legal principles in the cited precedents:
- The Tribunal had found that the petitioner took inconsistent positions in different forums — admitting liability to pay lease tax in certain other States (in proceedings before the Supreme Court) while denying liability in Kerala. The Court regarded this inconsistency as undermining the petitioner's bona fides, although it noted that it remains bound to decide the legal questions.
- The Court relied on the petitioner's admissions before the Tribunal describing the transactional pattern: (a) lessees identified the equipment vendor, (b) lease agreements were executed first, (c) thereafter the petitioner placed purchase orders and paid suppliers, and (d) suppliers were directed to dispatch the goods directly to the lessees in Kerala. The petitioner also admitted it had no place of business in Kerala during the relevant years and characterized itself as a non-resident dealer.
- The Court examined a representative lease agreement and the sequence of events (agreement on 28.9.1993; purchase order dated 16.10.1993; sale by supplier on 17.11.1993) to illustrate that goods were acquired and delivered after the lease agreement was executed. This factual pattern showed that leases were of goods not yet in the lessor's possession — i.e., leases of future goods.
- Applying the Supreme Court's decision in 20th Century Finance (specifically paragraph 35(d)), the Court held that where goods are not in existence at the time of agreement, the taxable event for the lease transaction is the delivery of goods. Because delivery to the lessee in Kerala occurred after the lease agreement and was the event giving effect to the lease, the lease transaction became taxable in Kerala upon delivery.
- The Court treated the overall arrangement as comprising two separate transactions: (i) the lease/hire agreement between petitioner and customer, and (ii) the subsequent purchase and delivery of goods by the petitioner to the customer. The inter-State character of the supplier-to-petitioner sale (where goods were sourced from outside Kerala) did not alter the separate nature of the lease transaction between petitioner and the lessee/hirer.
- The Court considered the petitioner's reliance on authorities that suggest inter-State movement to public carriers may make a transaction inter-State. The Court rejected that reliance here because the petitioner did not demonstrate that public carriers were arranged by the lessees/hirers, and because the petitioner itself undertook responsibility to purchase and deliver the goods. Therefore those authorities were not determinative in the petitioner's favor.
- Given the admitted facts and the settled legal principle that the taxable event in such future-goods lease transactions is delivery, the Court concluded that the Tribunal correctly applied the law to the facts and that the levy under the KGST Act was sustainable.
Holding and Implications
The Tax Revision Cases are dismissed and the orders of the Sales Tax Appellate Tribunal upholding the levy of sales tax on lease rentals and hire charges in Kerala are upheld.
Implications:
- Direct effect on the parties: The Tribunal's assessments (levying sales tax on the petitioner's lease rentals and hire charges in Kerala) remain in force; the petitioner's challenge is dismissed.
- The Court applied established law (notably the Supreme Court's ruling in 20th Century Finance) to the petitioner's conceded factual pattern to determine that the taxable event for lease/hire transactions — where goods were not in existence at the time of agreement — occurs on delivery in the State of use, here Kerala.
- The opinion does not purport to lay down any novel legal principle beyond application of existing precedents to the facts. The decision thus upholds the tax authorities' view and does not indicate the setting of a new precedent distinct from the authorities applied.
The Judgment of the Court was delivered by
C.N Ramachandran Nair, J.:— The petitioner-assessee, a company with head office at Chennai, has operations all over India including in the State of Kerala. It is engaged in leasing of equipments on rental basis and it is also selling goods under hire purchase scheme. The assessing officer, under the Kerala General Sales Tax Act, hereinafter called the “KGST Act”, assessed lease rentals and hire charges received by the petitioner in Kerala for sales tax. Even though petitioner filed successive appeals, assessments were confirmed by the appellate authorities, including the Sales Tax Appellate Tribunal. These Tax Revision Cases are filed in this Court against the final orders of the Sales Tax Appellate Tribunal upholding the levy.
2. The assessments involved are for the years 1989-90 to 1991-92 and from 1994-95 to 1997-98. The revisions for the first three years are reaching this Court a second round. In the first round of revisions against orders of Tribunal upholding assessments, this Court remanded the case back to the Tribunal once again for considering the issues raised after verifying the facts pertaining to delivery of goods and based on later decisions.
3. We have heard counsel appearing for the petitioner, Special Government Pleader appearing for the respondents, and have gone through the impugned orders of the Tribunal and the judgments relied on by both sides, particularly the two direct decisions; one of the Supreme Court in 20th Century Finance Corporation Ltd. v. State of Maharashtra, (119 STC 182) and the other that of the Division Bench of this Court in Madras Credit & Investments Ltd. v. State Of Kerala, (134 STC 264 : (2002) 10 KTR 678).
4. At the outset we are constrained to take note of the finding of the Tribunal that on the same issue the petitioner has taken diametrically opposite position in Tamil Nadu in Writ Petition (Civil) No. 489 of 2001 filed before the Supreme Court and in Kerala before the Sales Tax Authorities, including Appellate Tribunal and later before us in these Tax Revision Cases. The Tribunal after referring to the case filed by the petitioner before the Supreme Court quoted grounds L and M as follows:
L. That the respondents for the State of Tamil Nadu have no jurisdiction to proceed to assess, demand tax or penalty invoking S. 3-A of the TNGST Act, 1959 in cases where although agreements were entered into in the State of Tamil Nadu, the goods were not in existence on that date and therefore only the State in which the goods were delivered for use by the lessees which could bring to tax such transactions and which States have also done so.
M. That the respondents for the State of Tamil Nadu have no jurisdiction to proceed to assess, demand tax or penalty invoking S. 3 A of the TNGST Act, 1959 in respect of same transactions which have been assessed to tax by various other respondent States other than the State of Tamil Nadu and in respect of which the petitioners have also paid the appropriate lease taxes.
5. In view of the above grounds admitting liability for sales tax on these transactions in States like Kerala raised by the petitioner before the Supreme Court while challenging assessments made in Tamil Nadu, we feel there is no bona fides in the petitioner's case before the sales tax authorities in Kerala that they are not liable to pay sales tax on lease rentals or hire charges in Kerala. On the other hand, after taking the above stand before the Supreme Court while challenging Tamil Nadu assessments, the case of the petitioner before the sales tax authorities in Kerala including the Tribunal and before us in these Tax Revision Cases is that tax if any payable is in Chennai or outside Kerala where lease/hire purchase agreements are executed and wherefrom the goods are consigned to lessees or the hirers. The Supreme Court in paragraph 96 of the judgment above referred, while disposing of a batch cases, held that tax evasion should not be equated with tax planning. It is an admitted fact that sales tax Acts in all the States including Tamil Nadu and Kerala, are amended in tune with the Constitution (46th) Amendment Act, providing for levy of sales tax among other things on leasing transactions and on hire purchase transactions treating them as deemed sales for the purpose of levy of sales tax. After the amendments are carried out in these States, assessees, including the petitioner, are bound to pay sales tax on lease rentals and hire charges in appropriate State. However, it is clear that instead of remitting the tax in the appropriate State, petitioner claims in one State that tax is payable in the other State and when tax is demanded in the latter Stale they take the defence that tax is not payable anywhere. Even though we do not find any bona fides on the part of the petitioner in declining to pay tax on the transactions in any State in India, which is obviously defeating the statutory amendments authorised by Constitutional amendment, we are bound to decide questions of law raised in the Tax Revision cases. However, since the Supreme Court has comprehensively dealt with the scope of levy of tax on leasing transactions in the decision referred above what remains is only to apply the decision on the factual situation. So far as challenge against levy of tax for hire charges, the issue is covered against the petitioner by the decision of this Court referred above, which is stated to be confirmed by the Supreme Court.
6. Before proceeding to consider the issues raised we have to first refer to the nature of transactions carried on by the petitioner. In order to avoid confusion on factual situation, we extract below the nature of transaction admitted by the petitioner in their argument note submitted before the Tribunal, which is extracted by them in their order:
1. The appellants are financial lessors who have no expertise in identifying a manufacturer/vendor of an asset. The appellants are not in the business of effecting purchases of assets and then look for prospective lessees.
2. On the contrary, prospective lessees identify a vendor, men approach the appellants, enter into a lease agreement, and require the appellants to place purchase orders on the vendors identified by the lessees. Accordingly, the appellants first of all enter into lease agreements, thereafter place purchase orders on the vendors identified by the lessees, make disbursement of the purchase price and direct the vendors to directly despatch the assets to the lessees in the State of Kerala. In fact the appellants did not have any place of business in the State of Kerala during the years in question and were thus non resident dealers.
7. From the above factual position admitted by the petitioners, it is clear that lease agreements are first entered into between the petitioner and lessees and after executing such lease agreements only, the petitioner places purchase orders for equipments based on information furnished by the lessees. Even though there is admission of factual situation by the petitioner in the above manner, the Tribunal has gone into terms of a specific case of lease and they have noted that in respect of a lease agreement executed by the petitioner with a hotel company at Ernakulam on 28.9.1993, the purchase order was placed on the supplier of goods only on 16.10.1993 and goods were sold by the suppliers on 17.11.1993 In other words, the purchase of goods outside and delivery to lessees is made in Kerala after two months from the date of execution of lease agreement. The pattern of business is admittedly the same and therefore lease agreements executed by the petitioner were in respect of leasing of equipments which were not in existence at that time, or at least not purchased or possessed by the petitioner, and therefore lease agreements were for leasing of future goods to be acquired by the lessors. Now we refer to the law declared by the Supreme Court in 20th Century Finance Corporation Ltd. v. State of Maharashtra, (119 STC 182) on this factual situation. While concluding the Supreme Court in paragraph 35(d) held as follows:
35(d). In cases where goods are not in existence or where there is an oral or implied transfer of the right to use goods, such transactions may be effected by the delivery of the goods. In such cases the taxable event would be on the delivery of goods.
8. From the above it is clear that lease transactions pursuant to lease agreements executed by the petitioner without acquiring the goods to be leased out, operate only on delivery of goods to the lessee. Admittedly much after lease agreements goods are purchased and delivered by the petitioner to the lessees and lease charges except advance are payable only after delivery of goods for use by the lessees. We find from the order of the Tribunal that the Tribunal has exhaustively considered the contentions raised by the petitioner and applied the decision of the Supreme Court on the proved facts of the case. However, petitioner has relied on the decision of the Andhra Pradesh High Court in I.T.C Classic Finance and Services v. Commissioner of Commercial Taxes, (97 STC 330) and that of the Supreme Court in State of A.P v. National Thermal Power Corporation Ltd., (127 STC 280) and the decision reported in Bayyana Bhimayya v. Government of A.P, (12 STC 147) and contended that the lease and hire purchase transactions are inter-State in nature because in terms of the request by the petitioner suppliers have delivered the goods to public carriers for ultimate delivery to lessees or hirers. We are unable to uphold this contention of the petitioner, because petitioner itself has no case that public carriers are arranged by lessees or hirers to take delivery of the goods from manufacturers/suppliers arranged by the petitioner. In fact after entering into lease agreements, petitioner has admittedly undertaken the responsibility to purchase and deliver the goods to the lessees or hirers even though the goods so manufactured are identified by the lessees or hirers. As held by this Court in the decision in Madras Credit and Investments Ltd's case, there are two transactions in the deal, one is the agreement between the petitioner and the customer for lease or hire and the other is purchase and delivery of goods by the petitioner to the customer. The so-called inter-State movement of goods after purchase of goods by the petitioner makes the sale between the manufacturer/supplier to the petitioner as an inter-State sale. However, those inter-State movements have no connection with the separate lease transactions between the petitioner and the customer which according to the decision of the Supreme Court takes place only on delivery. It is clear from the Tribunal's order and that of all the lower authorities that whenever petitioner purchased goods within Kerala and leased out or hired to customers under lease agreement or hire purchase agreement, petitioner's transactions have been granted exemption because such deemed sales in the course of lease or hire purchase was accepted as second sales. The position is the same so far as inter-State purchase of goods by the petitioner for lease or for delivery under hire purchase scheme. The fact that such purchases by the petitioner are inter-State sales at the hands of the manufacturer/seller of goods does not mean that transaction between the petitioner and the customer is anything different from the lease or hire purchase. It is admitted that in all cases for lease or hire purchase, lease or hire purchase agreements are first entered into by the petitioner with the customers and thereafter only goods are purchased and delivered to the customers for use by them under lease agreement or hire purchase agreements, as the case may be. Since we have already found that there are two transactions in the deal, namely, execution of lease or hire purchase agreements, and the subsequent purchases and delivery, we do not think the nature of transaction, that is lease or hire purchase is affected, when goods are sourced from a State other than in the State in which it is given for lease or hire. In the circumstances, we are unable to uphold the contention of the petitioner that transactions are inter-State lease or inter-State hire purchase and hence not liable to pay tax.
9. We therefore uphold the orders of the Tribunal and dismiss the Tax Revision Cases.
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