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Smart Summary

Factual and Procedural Background

The Forty-sixth Amendment to the Constitution (effective 2 February 1983) broadened the scope of entry 54 of List II by inserting clause (29A) in article 366, defining “taxes on the sale or purchase of goods” to include the “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.” Pursuant to this constitutional change, section 2(g) of the Orissa Sales Tax Act, 1947 was amended (Act 13 of 1984) to include within “sale” a transfer of the right to use goods.

Relying on the enlarged definition, the Sales Tax Officer, Bhadrak Circle, issued a notice under sections 11(1), 12(5) and 12(8) of the Act to the petitioners to complete assessment for the year 1983-84. The notice treated the petitioners' hiring out of a bus to the Orissa State Road Transport Corporation as a transfer of the right to use the bus and thus as a “sale” under the amended definition.

The petitioners challenged the notice. The matter was heard by a Division Bench (B.L. Hansaria, C.J., and S.K. Mohanty, J.). The Court considered (a) the legal character of a transfer of the right to use goods under the extended constitutional/legislative definition, and (b) whether, on the facts and terms of the agreement between the petitioners and the Corporation, there was in fact a transfer of possession/right to use amounting to “sale” under section 2(g). The petition was dismissed and an earlier interim stay vacated.

Legal Issues Presented

  1. When does a “transfer of the right to use any goods” amount to a “sale” within the meaning of section 2(g) of the Orissa Sales Tax Act, 1947, in light of clause (29A) of article 366 of the Constitution (Forty-sixth Amendment)?
  2. On the facts of this case (hiring of a bus to the Orissa State Road Transport Corporation under the parties' agreement), had possession or effective control of the vehicle been transferred to the hirer so as to constitute such a transfer of right to use and thereby attract sales tax?

Arguments of the Parties

Department's Arguments (as presented by Shri Patnaik)

  • The Department relied on specific clauses of the agreement between the petitioners and the Corporation to show that the effective or general control of the vehicle rested with the Corporation.
  • Clause 1 required the owner to make the vehicle available for the entire period except two days per month (for maintenance), at times and places directed by the General Manager.
  • Clause 5 placed responsibility for maintenance and repair on the owner, but the two-day exception indicated limited retention of use by owner.
  • Clause 10 bound the owner to abide by orders and directions of the General Manager regarding starting station, operation, halts, destination, timing and routes.
  • Clause 14 prohibited the owner from using the vehicle on routes except as ordered by the Corporation and required surrender of the subsisting permit after commencement of the agreement.
  • Although the owner supplied a driver, clause 15 required the driver to follow directions of authorised Corporation officials and allowed replacement for misconduct.
  • Clause 16 required the Corporation to provide the conductor; overall, these terms showed practical control by the Corporation, amounting to acquisition of possession and transfer of the right to use the bus.

Petitioners' Arguments

  • The petitioners disputed the validity of the notice (annexure 1) issued under the Act and implicitly contended that the hiring arrangement did not amount to a “sale” under the Act's definition.
  • The opinion notes that the petitioners believed they were not liable to be taxed under the provisions of the Act and that they were not aware of the legal position, but the judgment records no detailed or technical legal arguments advanced by the petitioners on these points in the text.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Builders Association of India v. Union of India, [1989] 73 STC 370; (1989) 2 SCC 645; AIR 1989 SC 1371 Upheld the validity of the Forty-sixth Amendment which expanded the concept of “sale” to include transfer of the right to use goods. The Court observed that the constitutional amendment's validity had been upheld by the Apex Court and therefore proceeded on the basis of the extended definition of “sale”.
Bharat Heavy Electricals Ltd. v. Union of India, [1988] 71 STC 25 Earlier decision expressing a view consistent with upholding the constitutional change in scope. Referenced as another authority supporting the constitutional and legislative expansion of “sale.”
State Of Madras v. Gannon Dunkerley & Co., (Madras) Ltd, [1958] 9 STC 353; AIR 1958 SC 560 Had imposed a restriction on the concept of “sale of goods” before the Forty-sixth Amendment. The Court noted that the Forty-sixth Amendment freed the concept of “sale” from the restriction imposed by this earlier decision, so reference to the Sale of Goods Act was no longer necessary to determine “sale.”
Bank of India v. Commercial Tax Officer, [1987] 67 STC 199 (Calcutta High Court) Held that lease/hire of bank lockers was not “sale” within extended definition because the transaction involved rendering of various services and the bank retained significant control. Used as an example where hiring was not taxed as sale because of the bank's continuing control and ancillary services; the Court contrasted such features with the facts before it.
State Bank of India v. State of Andhra Pradesh, [1988] 70 STC 215 (Andhra Pradesh High Court) Held that hiring of lockers was not “sale” because there was an absence of delivery of goods; clause (29A) contemplates transfer of right to use in respect of goods delivered to the person concerned. Reinforced the principle that delivery/possession is an essential ingredient for treating a hire as a “sale”; the Court relied on this line of reasoning when emphasising delivery/possession.
20th Century Finance Corporation Ltd. v. State of Maharashtra, [1989] 75 STC 217 (Bombay High Court) Emphasised that acquisition of possession by the transferee is central to exercising the right to use hired goods. The Court cited this decision for the proposition that the transferee begins to exercise the right to use only after acquiring possession; this informed the possession/control test applied to the bus agreement.
Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer, [1990] 77 STC 182 (Andhra Pradesh High Court) Recognised transfer of the right to use as a species of bailment and held that delivery of possession is necessary; distinguished possession from custody and stressed effective control. The Court relied on this authority to underscore that effective possession/control (even if custody remains with transferor's agent) is determinative; it applied the effective-control test to find transfer of possession to the Corporation.

Court's Reasoning and Analysis

The Court approached the matter in stages, adhering strictly to principles stated in the opinion:

  1. Constitutional and statutory framework: The Forty-sixth Amendment (clause (29A) of article 366) and the subsequent amendment to section 2(g) of the Orissa Sales Tax Act broadened the meaning of “sale” to include transfer of the right to use goods. Because the Apex Court upheld the Amendment's validity (Builders Association of India), the Court proceeded under the enlarged statutory and constitutional definition.
  2. Conceptual distinction: The Court distinguished a contract of sale (which transfers property/ownership) from a transfer of the right to use goods (which does not transfer ownership). The owner retains proprietary rights while transferring a narrower bundle of rights (possession/use).
  3. Characterisation of transfer of right to use as bailment/hire: The Court adopted authority (Halsbury's and section 148 Indian Contract Act) that hiring a chattel is a species of bailment — a contract by which the hirer obtains the right to use the chattel for consideration. Bailment requires delivery of the goods to the bailee; possession is central.
  4. Possession/control test: Citing Salmond's Jurisprudence and 20th Century Finance Corporation, the Court emphasised that the transferee's right to enjoy/use is realised only upon delivery/acquisition of possession. The test is whether the hirer has effective or general control of the goods.
  5. Consideration of comparative authorities: The Court reviewed other High Court decisions where hiring arrangements were held not to be “sales,” notably where (a) the transaction involved substantial ancillary services and retained control (Bank of India v. CTO), or (b) there was absence of delivery/possession (State Bank of India v. State of Andhra Pradesh). Rashtriya Ispat Nigam was cited for the proposition that effective control/possession (distinct from mere custody) is decisive.
  6. Application to contractual terms: The Court analysed the specific clauses of the agreement between the petitioners and the Corporation (clauses 1, 5, 10, 14, 15, 16, and the surrender of permit requirement). These terms required the owner to make the vehicle available as directed by the Corporation, submit to the Corporation's orders on routes/timings, surrender the permit, and otherwise operate subject to Corporation directions (even though the owner provided the driver). The Court found that these provisions, taken together, showed that the Corporation had effective/general control over the vehicle and that possession (as distinct from mere custody) had in practice passed to the Corporation.
  7. Conclusion of legal characterisation: Because there was acquisition of possession by the Corporation and corresponding loss of possession by the owner, the Court concluded there was a transfer of the right to use the bus — a species of bailment/hire amounting to “sale” under the extended definition in section 2(g) of the Act. Consequently, the notice issued to the petitioners was valid.

Holding and Implications

Holding:

DISMISSED. The petition challenging the assessment notice was dismissed. The Court held that the hiring out of the bus to the Orissa State Road Transport Corporation, on the facts and terms of the contract, amounted to a transfer of the right to use the vehicle and therefore fell within the extended meaning of “sale” under section 2(g) of the Orissa Sales Tax Act.

Immediate consequences:

  • The notice issued under sections 11(1), 12(5) and 12(8) to complete assessment for 1983-84 was valid; the petitioners are liable to be assessed accordingly.
  • The interim stay previously granted in the matter was vacated.
  • The Court made no order as to costs, noting that this was the first case of its type to come before the Court and that the petitioners genuinely believed they were not liable to be taxed under the Act.

Broader implications:

This opinion applies the constitutionally enlarged concept of “sale” to transactions involving transfer of the right to use goods where effective possession or general control is transferred to the hirer. The opinion does not articulate any broader novel precedent beyond applying existing authorities and legal principles to the facts; its direct effect is to validate the assessment notice and to confirm that, on these facts, a hire arrangement can constitute a taxable “sale” under the amended definition.

    Krushna Chandra Behera And Another v. State Of Orissa And Others

    B.L Hansaria, C.J:— Forty-sixth Amendment to the Constitution, which came into force with effect from 2nd February, 1983, was aimed at augmenting the State revenues. For this purpose, the ambit of entry 54 of List II of the Seventh Schedule to the Constitution was widened to a considerable extent by providing a definition of “taxes on the sale or purchase of goods” by inserting clause (29A) in article 366 of the Constitution. This inclusive definition created many legal fictions. In the present proceeding we are concerned with the imposition of tax on the “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”. Following the constitutional clearance to impose tax on the transfer of the right to use any goods, the definition of “sale”, as given in section 2(g) of the Orissa Sales Tax Act, 1947 (shortly “the Act”) was amended by Act 13 of 1984, and one of its clauses stated that “transfer of the right to use any goods for any purpose” shall also be included in the expression “sale”.

    2. Relying on the enlarged definition of “sale”, a notice (annexure 1) was issued to the petitioners under sections 11(1), 12(5) and 12(8) of the Act by the Sales Tax Officer, Bhadrak Circle (opposite party No. 2), to complete the assessment for the year 1983-84 under section 12(5) of the Act. The notice had come to be issued in the wake of giving on hire a bus belonging to the petitioners to the Orissa State Road Transport Corporation (hereinafter, “the Corporation”) by treating the same as transfer of the right to use the bus.

    3. In so far as the validity of the Forty-sixth Amendment is concerned, the same has been upheld by the Apex Court in Builders Association of India v. Union of India, [1989] 73 STC 370; (1989) 2 SCC 645 : AIR 1989 SC 1371. A similar view had been earlier expressed by this Court in Bharat Heavy Electricals Ltd. v. Union of India, [1988] 71 STC 25. As is known, the constitutional amendment was made, inter alia, at freeing the concept of “sale of goods” from the restriction imposed upon it in the case of State Of Madras v. Gannon Dunkerley & Co., (Madras) Ltd, [1958] 9 STC 353 (SC); AIR 1958 SC 560. In view of the extended definition of “sale of goods”, as spelt out by the Forty-sixth Amendment, it is no longer necessary to refer to the Sale of Goods Act, 1930, to find out whether there has been sale of goods or not. The question to be decided for the case at hand is as to when there would be a transfer of the right to use any goods, to regard the same as sale within the meaning of section 2(g) of the Act. It is apparent that the transfer of the right to use any goods does not involve passing of property in the said goods. There is a conceptual distinction between a contract of sale as defined in section 4 of the Sale of Goods Act and a transfer of the right to use goods without being accompanied by transfer of the ownership in the goods in favour of the hirer. Unlike sale, in a case of transfer of any right to use goods, the proprietary right in the goods remains with the transferor. The owner of a property has a bundle of rights in it, namely, right to possess, right to use and enjoy, right to usufruct, right to consume, to destroy, to alienate or transfer, etc. In law, it is not only possible but also permissible that the various rights and interest may be vested in various persons. While remaining as the owner of a property, a person may create a charge on the property, mortgage it or lease it. In a transaction of sale, all the rights of the owner are transferred to the purchaser and it is said that the property in the goods passes to the purchaser.

    4. In the case at hand, as already stated, we are concerned with the legal conception of the transfer of the right to use. It has been stated that the transfer of the right to use is a species of bailment. One of the categories of bailment is hire of chattel. In Halsbury's Laws of England (4th Edition) at paragraph 1551 it has been defined as follows:

    “It is a contract by which the hirer obtains the right to use the chattel hired in return for the payment to the owner of the price of the hiring.”

    (Emphasis* supplied)

    5. So, bailment is the right to use a chattel for consideration. A lease of land and bailment of chattels are transactions of essentially the same nature, as stated at page 424 of Salmond's Jurisprudence, 12th Edition. In a lease, there is a transfer of the right to enjoy an immovable property. So also in bailment, there has to be a right to enjoy the movable property. Section 148 of the Indian Contract Act, 1872 has defined “bailment” in the following terms:

    “Section 148. ‘Bailment’, ‘bailor’ and ‘bailee’ defined.—A ‘bailment’ is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor’. The person to whom they are delivered is called the ‘bailee’.”

    6. So, in bailment, there is transfer of goods for a particular period and thereafter the goods have to be returned to the person delivering them. This apart, bailment requires delivery of the goods to the bailee. It is only upon delivery of the goods that the bailee becomes legally possessed of such goods and the hirer or the bailee becomes entitled to enjoy the use of the goods upon periodic payment or other valuable consideration to the bailor. Since the substance of the right is the enjoyment of the goods, the same is completed only upon the delivery of the goods. In other words, only after acquiring possession of the goods hired out, the transferee begins to exercise the right to use the same. (See 20th Century Finance Corporation Ltd. v. State of Maharashtra, [1989] 75 STC 217 at page 228). The test for determining whether a man is in possession of anything is whether he is in general control of it. (See page 273 of Salmond's Jurisprudence, 12th Edition).

    7. In so far as the question of transfer is concerned, it has a double aspect. It is the acquisition of a right by the transferee and loss of it by the transferor, as stated at page 332 of Salmond's Jurisprudence, 12th Edition.

    8. The question as to when hiring out of a movable property would amount to sale by treating the same as transfer of the right to use the goods has been considered in some of the decided cases of different High Courts of the country. As these decisions do throw light on the controversy at hand, let us see what was held therein.

    9. In Bank of India v. Commercial Tax Officer, [1987] 67 STC 199, a learned single Judge of the Calcutta High Court did not regard the lease of bank lockers as “sale” of the lockers within the extended definition of the expression “sale” because the hiring was regarded not merely a transfer of the right to use the lockers but rendering of various services. It was pointed out that the Bank had built a strong room, installed a steel cabinet with safety lockers with double locking system, access to lockers was checked and constant guard provided over the property. The locker could not be opened by a customer unless the bank opened the lock with a master key. Customers obtained admission to the vaults only when the bank allowed it. The authority granted to the authorised person had to be recorded in the books of the bank beforehand. The bank had a lien on the goods stored in the locker for the rent payable by the customer. Because of these, the contention of the department to tax the lease of lockers was rejected.

    10. A similar view was taken by a Division Bench of the Andhra Pradesh High Court in State Bank of India v. State of Andhra Pradesh, [1988] 70 STC 215. The reason for not regarding hiring of lockers as “sale” in this case, however, was that there was absence of delivery of the goods which was regarded as an essential ingredient in this connection. It was stated that clause (29A) of article 366 of the Constitution refers to cases where there is transfer of a right to use of goods delivered to the person concerned. Being of this view, it was stated that the definition does not take within its fold transactions which merely license a person to use goods without securing possession. Because of the peculiar nature of the transaction relating to the hiring of the lockers, some of which features have been noted in paragraph 14 of the judgment, it was held that there was no delivery of the lockers to the hirer. Because of this, the transaction was not held to be a “sale” and as such not exigible to sales tax.

    11. The decision of the Bombay High Court in 20th Century Finance Corporation' case, [1989] 75 STC 217, has already been noted wherein the acquisition of possession of the goods hired by the transferee to exercise the right of use was emphasised.

    12. It has been accepted in Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer, [1990] 77 STC 182, by another Division Bench of the Andhra Pradesh High Court that the transfer of the right to use the goods is a species of bailment, and for this purpose, delivery of possession of the goods is necessary. It was, however, pointed out that delivery of possession of a thing must be distinguished from its custody. It was observed that it was not uncommon to find the transferee of the goods in possession while the transferor having custody. This was illustrated by referring to hiring of a taxi cab under “rent-a-car” scheme, under which a cab is provided when usually the driver accompanies the cab. Here, the driver has the custody of the cab though the hirer will have the possession and effective control of the cab. This was contrasted with the case when a taxi is hired for going from one place to another. It was stated that in such a case, the driver has the custody as well as the possession; and what is provided is, service on hire. In this case, the transaction was not regarded as “sale” inasmuch as the effective control of the machinery was held to be with the transferor and not the transferee.

    13. We have, therefore, to see in the present case whether possession of the vehicle had been delivered to the hirer. For this purpose, effective control or general control of the vehicle by the hirer would be enough in view of what has been stated in this regard in Salmond's Jurisprudence.

    14. Shri Patnaik for the department referred us to certain clauses of the agreement (annexure 2) entered into between the petitioners and the Corporation to bring home the point that the effective control of the vehicle rested with the Corporation. At first, he refers to clause 1 of the agreement as per which the owner has to make available the vehicle for the entire period of the agreement except two days in a month at such time and place as may be directed by the general manager from time to time. The two days have been excepted by clause 1 for the purpose of maintenance and repair of the vehicle which part rests with the owner of the vehicle as stated in clause 5. Our attention is then invited to clause 10 as per which the owner has to abide by all orders and directions of the General Manager of the Corporation or any officer authorised by him in this behalf in regard to starting station of the journey, operation, haltage, destination, timing and routes, issued from time to time. Clause 14 is also pressed into service which states that the owner shall not use the vehicle covered by this agreement in any route except in accordance with the orders and directions issued by the Corporation under the agreement. The owner is required to surrender the subsisting permit granted in his favour immediately after the commencement of the agreement and to furnish necessary particulars of such surrender to the Corporation. Though a driver is to be provided by the owner of the vehicle, he has to follow, as per clause 15 of the agreement, the directions, orders and instructions of the authorised officials of the Corporation. If the driver is found disobedient or otherwise misbehaves with other staff or passengers, the owner has to replace him within three days on the request of the Corporation. As per clause 16, the Corporation has to provide the conductor for operation of the services. The above would show that for all practical purposes, the effective or general control of the vehicle under the agreement rests with the Corporation. Though the owner has to provide a driver and has to carry out necessary repairs, we do not think if it can be held that the effective control of the vehicle remains with the owner after the agreement is executed. According to us, there is acquisition of possession of the bus, as distinguished from its custody, by the Corporation, and loss of possession so far as the owner is concerned. There is thus transfer of possession of the bus as both the aspects mentioned by Salmond in this regard, which have been noted above, are satisfied and consequently there is transfer of the right to use the same.

    15. In view of the above, we are of the opinion that the present was a case of “sale” within the extended meaning of this word, inasmuch as there was transfer of the right to use the vehicle for valuable consideration. The petitioners were, therefore, rightly noticed. The grievance of the petitioners relating to the invalidity of the notice (annexure 1) cannot be accepted. The petition is, therefore, dismissed. The interim stay granted earlier stands vacated. There will be no order as to costs as the present is the first case of its type to come to this Court because of which the petitioners were not aware of the legal position and they verily believed that they are not liable to be taxed under the provisions of the Act.

    S.K Mohanty, J.:— I agree.

    16. Petition dismissed.

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    Krushna Chandra Behera And Another v. State Of Orissa And Others
    (Nov 13, 1990)