IN THE HIGH COURT OF KARNATAKA AT BANGALORE PRESENT THE HON BLE MR. JUSTICE N KUMAR THE HON BLE MRS. JUSTICE RATHNAKALA

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1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE Dated this the 6 th day of August, 2014 PRESENT THE HON BLE MR. JUSTICE N KUMAR AND THE HON BLE MRS. JUSTICE RATHNAKALA BETWEEN: STRP No.356 of 2012 & STRP Nos of 2013 The State of Karnataka Represented by the Secretary Finance Department Vidhana Soudha Bangalore Petitioner (By Smt. Sujatha AGA) AND: M/s. Lease Plan India Limited No.110, Oxford Tower Airport Road, Kodihalli Bangalore Represented by the Dealer Respondent

2 2 (By Sri K.G. Raghavan, Senior Counsel and Sri Ganapathi Hegde, M/s. Dua Associates, Advocates) These STRPs filed under Section 65 (1) of KVAT Act, against the judgment and order dated passed in STA Nos. 687 to 727 of 2010, 1131 to 1166 of 2010 and 1652 of 2010 on the file of the Karnataka Appellate Tribunal at Bengaluru, allowing the appeals. These STRPs coming on for hearing this day, N. KUMAR J made the following: O R D E R The State has preferred these Revisions against the order passed by the Karnataka Appellate Tribunal deleting the levy of tax under the provisions of the Karnataka Value Added Tax Act, 2003 in respect of turnover relating to the deferred sale consideration received after in respect of the transfer of right to use KST suffered goods leased out prior to The assessee is a Company incorporated under the Companies Act, It was a dealer under the Karnataka Sales Tax Act, 1957 (hereinafter for short referred to as the KST Act ) up to From the assessee is a

3 3 registered dealer under the provisions of the Karnataka Value Added Tax Act, 2003 (hereinafter for short referred to as the KVAT Act ). The assessee is engaged in the lease of cars to corporate bodies and to other customers in the State of Karnataka. All the cars which were leased out by the assessee till were purchased by it from dealers registered under the KST Act. The cars given on lease after were purchased from dealers registered under the KVAT Act. All such cars had suffered local tax in the State of Karnataka either under the KST Act or under the KVAT Act. Master lease agreements in standard formats were entered into by the assessee with the concerned customers for the tenure of five years. Soon after the execution of such agreements the cars were also delivered by the assessee to the concerned customers who possessed them uninterruptedly till the expiry of the lease period. Leasing of cars constitute deemed sales involving the transfer of right to use goods under the definition of Sale in the KST Act and the KVAT Act. The charging provision under the KST Act

4 4 prescribing levy of tax on transfer of right to use goods is Section 5-C. Keeping in view the scheme of single point taxation under the KST Act, the proviso to the said Section which deals with the deemed sales involving the transfer of right to use goods which have suffered single point tax at the time of their purchase from local registered dealers were not exigible to tax under the proviso to Section 5-C of the KST Act. Under the KVAT Act, the charging Section 3 prescribes the levy of tax on the deemed sale involving transfer of right to use goods. The Prescribed Authority held that, when the customers made payments of lease rentals on a monthly basis during April 2005 and during the subsequent months, there were deemed renewals of the lease agreements and each such renewal constituted a deemed sale involving the transfer of right to use goods. On such basis, the assessee was made liable to pay tax under the KVAT Act on such lease rentals received from April 2005 and onwards up till September 2008 which relate to the KST suffered cars given on lease prior to

5 5 3. Aggrieved by the said order, the assessee preferred an appeal to the Joint Commissioner of Commercial Taxes (Appeals)-1 who upheld the order of the Prescribed Authority and dismissed the appeals. 4. Aggrieved by the said order, the assessee preferred a second appeal to the Karnataka Appellate Tribunal. The Karnataka Appellate Tribunal after referring to the provisions of the KST Act as well as the KVAT Act held that, the taxing event under the KST Act is the sale of the relevant goods. In the case of transfer of right to use goods, the deemed sale occurs when the relevant agreement of transfer of right to use goods is executed. At that point of time itself the entire consideration for the entire duration of the contract could have been mentioned by the assessee Company and its customer in specific and definite terms in the contract itself in clear terms in which event, that entire consideration would have become liable to tax if the concerned vehicle had not suffered local tax under Section 5 of the KST Act even though most of such consideration is

6 6 deferred for a future period and staggered to be paid at the end of every month. The concept of renewal of lease agreement every month when hire charge/lease rental/deferred consideration for that month is paid has its roots in the concept of bailment of the third kind. Since the impugned levy of tax is not on bailment, such a concept of renewal is impermissible in the context of charge of tax on the transfer of right to use goods. The liability to tax is only under Section 5-C of the KST Act. Since such cars are KST suffered cars, in terms of the proviso to Section 5-C of the said Act, the rate of tax on such transfer of right to use goods is zero. That zero rated liability will not change merely because the deferred payments relating to that deemed sale are realized after when a different tax law is in force. There are no words in the KVAT Act to the effect that the vested rights of any assessee which accrued to him under the KST Act shall be impaired. The assessee herein had the vested right under the proviso to Section 5-C of the KST Act not to be fastened with any levy of tax under that

7 7 Section on the transfer of right to use goods which had already suffered single point sales tax under Section 5 of the said Act. This immunity of the assessee cannot be affected or impaired by the enactment of the KVAT Act, which is expressly enacted with prospective effect from There is no provision therein authorizing the levy of tax under the KVAT Act on the deferred receipts of consideration of sale which occurred prior to when the said Act was not in force. Therefore, the Tribunal held that the assessee is not liable to pay tax under the KVAT Act on the rentals received prior to till the expiry of the lease period. Aggrieved by the said order, the State has preferred these Revisions. 5. Learned Government Advocate assailing the impugned order contended that, though under the KST Act there was no liability to pay tax after coming into force of the KVAT Act, as consideration is received every month, that consideration forms part of the turnover and liability to pay tax arises under the KVAT Act. She also submitted that,

8 8 though the period of lease is agreed upon by the parties, as payments are made every month it is a case of renewal of the lease every month and, therefore, there is a sale at the time of such renewal and consequently the amounts received as rentals is liable to tax under the KVAT Act and, therefore, she submits the order of the Tribunal is erroneous and requires to be set aside. 6. Per contra, the learned counsel for the assessee submitted that, when a lease agreement was entered into during the KST regime, on delivery of the cars on execution of such agreement, a deemed sale took place. The consideration payable for such sale is deferred. In other words it is payable every month. It is only the consideration received in pursuance of the sale which is liable to tax under the KVAT Act, the sale having been taken place prior to the coming into force of the KVAT Act and the lease rentals is payable every month, the amounts received after the KVAT Act coming into force cannot become the part of the sale consideration for the period subsequent to KVAT coming into

9 9 force and, therefore, he submits the Tribunal was justified in passing the impugned order. 7. The question of law that arise for our consideration in these Revisions is, Whether the Tribunal was justified in giving a finding that the lease rentals received after in respect of transfer of right to use KST suffered cars leased out prior to is not exigible to tax under the KVAT Act? 8. The facts are not in dispute. The assessee under a lease agreement leased to its customers KST suffered cars after purchasing them from local registered dealers. The tenure of the Master Lease Agreement were continuous and unbreakable for 5 years though lease rentals were payable by the customers on a monthly basis. Therefore, the assessee had a vested right of giving the cars on hire and receiving the rentals which was not exigible to tax. From

10 KVAT Act has come into force. Section 3 is the charging Section. It provides that, the tax shall be levied on every sale of goods in the State by a registered dealer or a dealer liable to be registered, in accordance with the provisions of this Act. Therefore, the incidence of tax under Section 3 of the KVAT Act is the sale of goods. After the coming into force of the new Act, the assessee has not leased any car to his customers. Lease was prior to It is for a period of 5 years. Under the terms of the agreement, the customer has to pay lease rents for every month for a period of 5 years. Therefore, though the assessee continued to receive rentals every month after , it is in pursuance of a sale which took place prior to As no sale has taken place after , the liability to pay tax under Section 3 does not arise. 9. In the judgment of the Delhi High Court reported in [(2010) 29 VST 346] in the case of M/s INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LIMITED vs COMMISSIONER OF VALUE ADDED TAX AND OTHERS on

11 11 which reliance was placed by the revenue, there was a specific provision for levying of tax in respect of contracts entered into prior to coming into force of the Act. Therefore, the legislature expressly took away the right vested in the assessee prior to coming into force of the said Act. Such a provision is conspicuously missing in the KVAT Act. Though the legislature has the power to take away a vested right by express words, when the legislature has made it clear that the Act is prospective, the Court by interpretative process cannot take away the right which is vested in an assessee. That is what the Tribunal has precisely held after referring to the various judgments on which reliance was placed. Therefore, the finding recorded by the Tribunal is just and proper and is in accordance with law. Therefore, the question of law is answered in favour of the assessee and against the revenue. Hence, we do not see any merit in these revisions and accordingly they are dismissed.

12 12 If, after expiry of the lease period, the assessee were to lease the cars again to the customers, the benefit of Section 5-C would not be available to him as the sale takes place after the coming into force of the KVAT Act and the provisions of the KVAT Act are attracted to such sales. Sd/ JUDGE Sd/ JUDGE ckl/-