1. This petition raises a ticklish but an interesting question for consideration whether transportation charges received by the petitioner—a transporter—from respondent No. 3—a distillery—engaged in the business of manufacture of Indian-made foreign liquor in connection with the transportation of India made foreign liquor from the distillery to various Government bonded warehouses, are liable to tax under section 3-F of the U.P Trade Tax Act, 1948 (briefly, “the Act”).
2. Article 366 of the Constitution of India came to be amended by the Constitution (Forty-sixth Amendment) Act, 1982. By the Amending Act, 1982, clause (29A) was inserted in article 366. Clause (29A), sub-clause (d) of article 366, which is relevant for the purpose of this case runs as under:
“(29A) ‘tax on the sale or purchase of goods’ includes—
(a) to (c) ………………
(d) a 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.”
3. Prior to the insertion of clause (29A) in article 366, trade tax which was formerly known as sales tax was chargeable on sale or purchase of goods but by clause (29A) the definition of the expression “sale or purchase” was made inclusive. In view of the constitutional amendment, consequential amendment was made in the Act. section 3-F was inserted by U.P Act No. 25 of 1985 with effect from September 13, 1985 which provides that the turnover relating to the business of transfer of right to use any goods for any purpose shall be liable to tax. Clause (h) in section 2 of the Act defining the word “sale” was substituted by U.P Act No. 25 of 1985 with effect from February 2, 1983. Section 2, clause (h), sub-clause (iv) which is germane for this case, runs as follows:
“(h) ‘sale’, with its grammatical variations and cognate expressions, means any transfer of property in goods (otherwise than by way of a mortgage, hypothecation, charge or pledge) for cash or deferred payment or other valuable consideration, and includes—
(i) to (iii) ………
(iv) 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.”
4. The petitioner entered into an agreement with the distillery (respondent No. 3) vide agreements deed dated July 25, 1987, annexures 1 and 2 to the writ petition. Under the said agreements, the petitioner transported Indian-made foreign liquor produced by respondent No. 3 to various Government bonded warehouses and received transportation charges therefor. The assessing officer initiated assessment proceedings for the assessment years 1987 to 1991 against the petitioner in view of section 3-F of the Act bringing the transportation charges received by the petitioner from respondent No. 3 to tax taking the view that the petitioner transferred the right to use of its vehicles to respondent No. 3 for consideration and, therefore, that amounted to sale under section 2, clause (h) of sub-clause (iv) of the Act. Such stand of the department is seriously contested by the petitioner. The contention of the petitioner is that transportation charges were being paid by respondent No. 3 for service under the agreements deed and that there was no transfer of the right to use the vehicles of the petitioner. It is contended that the petitioner does not have any vehicle of its own and that to fulfil the agreements it arranged vehicles from the open market for the use of respondent No. 3 and that since the petitioner has no vehicle of its own it could not have transferred the right to use of any vehicle to respondent No. 3.
5. The question for consideration is whether on the facts and circumstances of the case transportation charges received by the petitioner from respondent No. 3, are liable to tax under section 3-F of the Act. To answer this question it is to be found whether there is transfer of the right to use of vehicles of the petitioner in favour of respondent No. 3. No case has been set up in the counter-affidavit by the department that agreements relate to particular vehicles. The contention of the department is that when a vehicle is loaded with the goods of respondent No. 3, that vehicle remains under charge and control of respondent No. 3 until the vehicle is unloaded at the destination and that from the point of loading to the point of unloading the consignment, the vehicle continues to be under the control and possession of respondent No. 3 and that fulfils the ingredients of the expression “transfer of the right to use any goods for any purpose”, occurring in section 3-F read with section 2, clause (h), sub-clause (iv) of the Act.
6. The submission of counsel for the petitioner is that mere use of goods or mere right to use of goods is not enough but there must be transfer of the right to use of any goods and that can be said to have been made only when complete possession with full control of specified goods is transferred. It is submitted that without transfer of possession of specified goods, transfer of the right to use any goods within the meaning of section 3-F cannot be conceived. We see force in this submission of counsel for the petitioner. Unless there is an agreement in respect of specified vehicles, it is difficult to say that the petitioner transferred right to use of vehicles to respondent No. 3. Right to use can be said to have been transferred when complete possession of specified vehicles is vested in respondent No. 3. Under the agreements executed between the parties, respondent No. 3, if called upon to state, cannot state that right to use of any particular vehicle was transferred to it by the petitioner. Neither the petitioner nor respondent No. 3 can pin point any vehicle which could be used for carrying the goods of respondent No. 3. Unless vehicles are specified and they are put in actual possession of respondent No. 3 it cannot be said that right to use those vehicles is transferred by the petitioner to respondent No. 3.
7. From a careful perusal of the agreements deed, annexures 1 and 2 to the writ petition, it is clear that trucks to be used for carrying the goods of respondent No. 3 will continue to remain in the custody of the drivers, employed by the owner(s) of the trucks. Respondent No. 3 could have used vehicles supplied by the petitioner only for the purpose of specified goods and not for any other purpose. Transit risk was of the petitioner and not of respondent No. 3. It was the duty of the transporter to abide by all the laws relating to the motor vehicles and the excise. From these factors it is manifest that there was no transfer of possession even of the vehicles which were being used for carrying the goods of respondent No. 3. On the other hand the extent of the consignment to be loaded and the transportation charges to be paid to the petitioner are well specified. In absence of the vehicles being specified and in absence of possession of specified vehicles having been transferred to respondent No. 3 by the petitioner and the petitioner being entitled only to transportation charges on contractual rate, we find force in the contention of the petitioner that the contract was for rendering service on payment and that there was no transfer of the right to use of any specified vehicles to respondent No. 3.
8. It is averred in the counter-affidavit that four trucks are owned by the petitioner and, therefore, the contention of the petitioner that it arranged vehicles time to time from the open market for the use of respondent No. 3 is incorrect. Even if, the contention of the department that the petitioner owned four trucks is assumed to be correct that will not make any material difference since there is no agreement between the parties that any specified truck belonging to the petitioner will be used for carrying the consignment of respondent No. 3. It is stated in the counter-affidavit that respondent No. 3 is liable to make payment for downward journey. Payment for downward journey is not determinative of the fact whether or not there was transfer of the right to use in any goods.
9. The case of the department is that the purpose of the constitutional amendment and the consequential amendment made in the Act was to rope in the transporters and that charging section 3 should be so construed as to not defeat the constitutional obligations. There is nothing on record to indicate that the constitutional amendment was brought with a view to roping in the transporters. It is difficult to accept that the vehicle being used for the purpose of the goods of respondent No. 3 remained under the possession and control of respondent No. 3 between the point of loading and unloading of the consignments.
10. Similar question came up for consideration in Kandoi Transport v. S.T.O Assessment Unit, Barbil, (1992) 43 STL 167. (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 “higher 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 any transfer of right of user is involved. By way of illustration we may indicate that if ‘A’ allows 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.”
11. The intention of the parties, mode of use and several other surrounding and relevant aspects have to be considered to come to the conclusion whether or not there is transfer of the right to use of any goods. A mere contract of hiring without more, is a species of the contract of bailment. Transfer of right implies that full liberty is vested on the transferee to have the right to use the goods to the exclusion of all others including the owner of the goods. From the facts of the case at hand, it is not at all established that between the point of loading and unloading of the consignments of respondent No. 3, the vehicles were being used by respondent No. 3 to the exclusion of all others including the owner of the vehicles. The vehicles were driven by the drivers employed by the owner(s) of the trucks and there was none for respondent No. 3 to exercise any control over the vehicles to the exclusion of others during the transit. Transit risk also was on the petitioner. Therefore, we see no substance in the contention of the department.
12. In Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer, Company Circle, Visakhapatnam, [1990] 77 STC 182 (AP), 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 the 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 as such 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 other 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 transferor 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.
13. As already pointed out the vehicles remained in the custody of the petitioner through the drivers and, therefore, it cannot be said that respondent No. 3 was in possession of them between the point of loading and unloading of its consignments. We are, therefore, of the view that the contract between the petitioner and respondent No. 3 was only a contract for service and the transportation charges received by the petitioner from respondent No. 3 are not exigible to tax under section 3-F of the Act as there was no transfer of the right to use of any specified vehicles.
14. For the above reasons, the petition succeeds and is allowed. Entire assessment proceedings relating to the consecutive assessment years 1987 to 1991 initiated by respondent No. 2 against the petitioner in regard to transportation charges are quashed.
15. Petition allowed.