State tax on right-to-use goods upheld, but inter-State and import-export transactions must be excluded from assessment.

The Karnataka Sales Tax Act provisions on deemed sales of the right to use goods were upheld because the State may fix the situs of such transfers where the goods are for use within the State, but it cannot tax transactions that are in substance inter-State sales or sales in the course of import or export. The constitutional limits in articles 246, 269 and 286, read with article 366(29A) and the Central Sales Tax Act, require exclusion of non-taxable transactions at the assessment stage. The impugned assessments were quashed and remitted for fresh examination, with direction to exclude transactions outside State taxing power.

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Issues: Whether section 5-C and Explanation (3)(d) of section 2(1)(t) of the Karnataka Sales Tax Act, 1957 were ultra vires on the ground that they could tax transactions falling in the course of inter-State trade or commerce or in the course of import or export, and whether the impugned assessments could stand.

Analysis: The constitutional scheme under articles 246, 269 and 286, read with article 366(29A), permits the State to levy tax on transfers of the right to use goods, but the State's power remains subject to the constitutional prohibition against taxing sales or purchases outside the State, in the course of import or export, or in the course of inter-State trade or commerce. The provision in section 5-C is a levy on deemed sales of the right to use goods, while Explanation (3)(d) fixes the situs of such transfers where the goods are for use within the State. The Court read that explanation along with the exclusionary language already built into the Act and the principles under sections 3, 4 and 5 of the Central Sales Tax Act, 1956, and held that the State legislature had not transgressed its competence. The Court further held that transactions which are truly inter-State or export/import transactions cannot be subjected to the State levy merely because the goods are used within the State; such transactions must be excluded on assessment, and the assessing authority must examine the nature of each transaction afresh.

Conclusion: Section 5-C and Explanation (3)(d) were upheld as constitutionally valid, but their operation was confined so as not to cover inter-State, import or export transactions. The assessment orders were quashed and the matters were remitted for fresh examination and exclusion of non-taxable transactions.

Ratio Decidendi: A State may fix the situs of a deemed sale in respect of transfer of the right to use goods, but it cannot, consistently with the Constitution and the Central Sales Tax Act, tax transactions that are in substance inter-State sales or sales in the course of import or export.

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