'Transfer of right to use' in Explanation 3(d) to s.2(t) read down; CST Act s.4 governs import, inter-state, outside sales

SC held that a State provision deeming a "transfer of right to use" goods to occur within the State (Explanation 3(d) to s.2(t)) and clause (b) of s.5E exceeded legislative power under Entry 54, List II. Those provisions were read down: they do not apply to (i) outside sales, (ii) sales in course of import into or export out of India, or (iii) inter-State sales. Consequently, Central Sales Tax Act s.4 governs such transactions and most appeals and petitions were allowed (except specified appeals). A separate judgment disagreed on the interpretation of when a deemed sale is complete.

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Issues Involved:

1. Power of State Legislature to levy sales tax on the transfer of right to use goods under Article 366(29A)(d) of the Constitution.
2. Situs of the taxable event on the transfer of right to use goods.
3. Validity of state legislations imposing sales tax on deemed sales.
4. Applicability of the Central Sales Tax Act's principles to deemed sales.
5. Whether the transaction of transfer of right to use goods can be considered a contract of bailment.
6. Constitutionality of specific provisions in the sales tax laws of Maharashtra, Karnataka, Tamil Nadu, Haryana, Uttar Pradesh, Rajasthan, and Andhra Pradesh.

Issue-wise Detailed Analysis:

1. Power of State Legislature to Levy Sales Tax:
The court examined whether State Legislatures have the power to levy sales tax on the transfer of the right to use goods under Article 366(29A)(d). It was determined that such power is subject to two limitations: one arising from entry 54 of List II, which is subject to entry 92-A of List I, and the other from restrictions in Article 286. Thus, states cannot levy sales tax on inter-State sales, sales outside the state, or sales in the course of import/export.

2. Situs of the Taxable Event:
The court held that the taxable event for the transfer of the right to use goods occurs when the contract transferring the right is executed. The situs of the sale is the place where the contract is executed, not where the goods are located for use. For oral or implied transfers, the taxable event occurs upon delivery of the goods.

3. Validity of State Legislations:
The court scrutinized the sales tax laws of Maharashtra, Karnataka, Tamil Nadu, Haryana, Uttar Pradesh, Rajasthan, and Andhra Pradesh. It found that the provisions in these laws, which deemed the transfer of right to use goods to occur within the state based on the location of goods, were beyond the legislative power conferred under entry 54 of List II. The court directed that these provisions be read down to exclude outside sales, inter-State sales, and sales in the course of import/export.

4. Applicability of Central Sales Tax Act's Principles:
The court clarified that the principles under sections 3 and 4 of the Central Sales Tax Act apply to deemed sales under Article 366(29A)(d). However, since the definition of "sale" in the Central Sales Tax Act was not amended post-Forty-sixth Amendment, these principles cannot be applied by analogy to fix the situs of deemed sales.

5. Contract of Bailment:
The court rejected the view that the transaction of transfer of right to use goods is a contract of bailment. It emphasized that such transactions are deemed sales under the legal fiction in Article 366(29A)(d), where the location or delivery of goods is immaterial. The court held that the transfer of the right to use goods involves both the passing of a right in and the domain of the goods.

6. Constitutionality of Specific Provisions:
The court examined specific provisions in the sales tax laws of various states:
- Maharashtra Act: The Explanation to section 2(10) was held to transgress legislative power and was directed to be read down.
- Karnataka Act: Explanation 3(d) to section 2(t) was similarly read down.
- Tamil Nadu Act: Explanation 3(a) to section 2(n) was read down.
- Haryana Act: Note 4 to section 2(l) was read down.
- Uttar Pradesh Act: Clause (ii) of Explanation I to section 2(h) was read down.
- Rajasthan Act: Explanation II(b) to section 2(38)(4) was read down.
- Andhra Pradesh Act: Clause (b) of section 5E was read down.

Separate Judgment Analysis:

Judge Syed Shah Mohammed Quadri:
Justice Quadri dissented on the interpretation of sub-clause (d) of clause (29A) of Article 366. He emphasized that the transfer of the right to use goods involves both the passing of a right and control over the goods. He argued that the taxable event is complete when control/domain of the goods is given to the hirer, not merely on the execution of a contract. He also highlighted that the actual use of goods is irrelevant for the taxable event under sub-clause (d). Justice Quadri found the impugned provisions of the state laws unconstitutional and struck them down.

Conclusion:
The court allowed the civil appeals and writ petitions, except for Civil Appeal Nos. 6218 to 6223 of 1995, which were dismissed. The relevant assessment orders were set aside, and the respondents were directed to reassess the appellants and petitioners in accordance with the principles laid down in the judgment.

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