Supreme Court Upholds Tax Deduction at Source on Transfer of Right to Use Goods: State of Tripura vs. Chandan Deb (2023)

Introduction

Date of the Judgment: March 24, 2023

Citation: (2023) INSC 266

Judges: M. R. Shah, J., Krishna Murari, J.

Can a state government mandate tax deductions at source for the transfer of the right to use goods, even if the primary tax liability remains with the dealer? The Supreme Court of India recently addressed this question in a case concerning the Tripura Sales Tax Act, 1976. This judgment clarifies the scope of tax deduction at source and its relationship with the main charging provisions of the Act. The Court held that the tax deduction at source is a valid mechanism for recovery of tax, and it does not change the main liability of the dealer to pay the tax. The judgment was delivered by a bench of Justices M. R. Shah and Krishna Murari, with Justice M. R. Shah authoring the opinion.

Case Background

The case involves a dispute over the legality of Rule 3A(2) of the Tripura Sales Tax Rules, 1976, which mandated a 4% tax deduction at source on payments made for the transfer of the right to use goods. The State of Tripura had issued a memorandum in 1992, enforcing this deduction. Several entities, including ONGC, Gas Authority of India Ltd. (GAIL), and Food Corporation of India (FCI), had hired vehicles from various suppliers. These suppliers then challenged the legality of the tax deduction, arguing that there was no charging provision in the Tripura Sales Tax Act, 1976 (TST Act) for such a deduction.

The suppliers contended that the tax deduction at source was illegal as there was no charging provision under the TST Act for levy of sales tax on transfer of the right to use goods. They also argued that Rule 3A suffered from absence of delegation of power. The State of Tripura, however, argued that the transactions were “sales” under Section 2(g)(ii) of the TST Act, and that the second proviso of Section 3(1) of the TST Act made such transfers taxable at 4%.

Course of Proceedings

The original writ petitioners, who were the suppliers of vehicles, filed writ petitions before a single judge of the Gauhati High Court, challenging the validity of Rule 3A(2) of the TST Rules. The single judge declared Rule 3A(2) ultra vires but held the suppliers liable to pay sales tax under Section 3AA of the TST Act. Both the State and the suppliers appealed this decision to a Division Bench of the High Court. The Division Bench upheld the decision that Rule 3A(2) was ultra vires and overturned the single judge’s finding that the suppliers were liable under Section 3AA of the TST Act. The State of Tripura then appealed to the Supreme Court of India.

Legal Framework

The core of the legal framework revolves around the Tripura Sales Tax Act, 1976, and the Tripura Sales Tax Rules, 1976. Key provisions include:

• Section 2(b) of the TST Act: Defines “dealer” as any person who sells taxable goods, including those who make a sale under Section 3A.
  
  “dealer” means any person who sells taxable goods manufactured, made or processed by him in Tripura or brought by him into Tripura from any place outside Tripura for the purpose of sale of Tripura 1 [and includes Government and any person making a sale under section 3A;”
• Section 2(g) of the TST Act: Defines “sale” to include any transfer of the right to use goods for any purpose.
  
  “Sale” means any transfer of property, in goods for cash or deferred payment or other valuable consideration, and includes— (i)any delivery of goods on hire-purchase or any system of payment in instalments, (ii)any 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, and such delivery or transfer of any goods shall be deemed to be a sale of those goods by the person making the delivery or transfer and a purchase of those goods by the person to whom such delivery or transfer is made but does not include a mortgage, hypothecation, charge or pledge;”
• Section 3(1) of the TST Act: The charging section, which imposes a tax on the turnover of every dealer in taxable goods. The second proviso of Section 3(1) specifies a 4% tax on the transfer of the right to use any goods.
  
  “Every dealer in taxable goods shall pay a tax on his turnover at the rate specified in column (3) of the schedule attached to this Act : Provided that subject to the provisions of section 14 and 15 of the Central Sales Tax Act, 1956 the State Government may, from time to time by notification in the Official Gazette and subject to such conditions as it may impose, fix a higher rate of tax 3 [not exceeding forty percent or any lower rate of tax payable under this Act on account of the sale of any taxable goods or class of taxable goods specified in such notification ; and thereupon the Schedule shall be deemed to be amended accordingly:…………………………………………………………………….. Provided further that the rate of tax on any transfer of the right to use any goods for any purpose (whether or not for a specified period) shall be 4%]”
• Section 3AA of the TST Act: Provides for the deduction of tax at the time of payment to any person liable to pay tax under Section 3A.
  
  “Any person responsible for paying any sum to any person liable to pay tax under section 3A of the Act, shall at the time of credit of such sum to the account of the person or at the time of payment thereof in cash or by issue of a cheque or draft or any other mode, such amount towards sales tax as may be prescribed.”
• Section 44 of the TST Act: Grants the State Government the power to make rules for carrying out the purposes of the Act.
  
  “(1) The State Government may, make rules for carrying out the purposes of this Act. (2) Without prejudice to the genererality of the foregoing power, such rules may, in particular prescribe— (a) all matters required by this Act to be prescribed ; (b) the clauses and duties of officers appointed for the purposes of enforcing the provision of this Act; (c) the procedure to be followed and the forms to be adopted in proceedings under this Act ; (d) the intervals at which, and the manner in which, the tax under this Act shall be payable; (e) the dates by which and the authority to which returns shall be furnished ; (f) the manner in which refunds shall be made ; (g) the fees, if any, for petitions, certificates and other; (h) the nature of accounts to be maintained by a dealer ; and (i) For any other matter necessary for giving effect to the purpose of this Act. (3) Every rule made by the State Government under this Act shall be laid as soon as may be after it is made, before Legislative Assembly while it is in session for a total period of not less than fourteen days which may be comprised in one session or in two or more successive sessions and if, before expiry of the sessions, in which it is so laid or the successive aforesaid the Legislative Assembly agree in making any modification in the rule or the Legislative Assembly agree that the rule should not be made, the rule shall thereafter have effect only in such modified from or be of no effect as the case may be, so, however, that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule.”
• Rule 3A(2) of the TST Rules: Mandates a 4% tax deduction at source on payments for the transfer of the right to use goods.
  
  “Every person responsible for making payment to any person for discharge of any liability on account of valuable consideration payable for any transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash or in any manner, shall at the time of making such payment, deduct an amount equal to four percentum of such towards part or as the case may be, full satisfaction of the tax payable under the Act, on account of such transfer of right:”

Arguments

The State of Tripura argued that Rule 3A(2) was a valid machinery provision for the recovery of tax, not a charging provision. The state contended that the transactions of hiring vehicles fell under the definition of “sale” in Section 2(g) of the TST Act, and the second proviso to Section 3(1) imposed a 4% tax on the transfer of the right to use goods. The State also argued that the rule-making power under Section 44 was broad enough to include tax deduction at source.

The vehicle suppliers, on the other hand, argued that there was no charging provision in the TST Act for tax deduction at source on the transfer of the right to use goods. They argued that the liability to pay sales tax is on a registered dealer, and they were not registered dealers. They also contended that Rule 3A(2) exceeded the scope of the TST Act.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. “Whether Sub-rule (2) of the Rule 3A of the TST Rules can be declared ultra vires being contrary to the provisions of the ‘TST Act’, though there is express proviso in Section 3(1) for levy of 4% Sales Tax on any transfer of the right to use any goods for any purpose?”

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the TST Act and the nature of tax deduction at source. The Court emphasized that Rule 3A(2) was a machinery provision designed to facilitate tax collection and did not create a new tax liability. The Court also stressed that the transfer of the right to use goods was a “sale” under the TST Act, making the transferor liable to pay tax.

The Court rejected the argument that Rule 3A(2) was ultra vires because it was not a charging provision. The Court clarified that the charging provision was Section 3(1) of the TST Act, and Rule 3A(2) was merely a mechanism for the recovery of tax. The Court also rejected the argument that the suppliers were not liable to pay tax because they were not registered dealers, holding that the transfer of the right to use goods was a “sale” under the Act, making the transferor liable to pay tax.

The Court stated, “What Rule 3A(2) provides is only for a machinery/mechanism where the person buying the goods is required to deduct the tax at source and deposits the same with the Revenue. It does not in any manner change the chargeability of the tax or liability of the tax which is under Section 3(1) of the TST Act read with Section 2(b) & 2(g) of the TST Act.”

The Court further clarified, “As observed hereinabove the rules are framed in exercise of Rule-making power under Section 44 of the Act and in that view of the matter and as the liability to pay the tax on transfer of right to use the goods shall still be continued under proviso to Section 3(1), mere providing for mode of recovery and/or providing for machinery/mechanism to recover the tax to be paid by the transferer/supplier from the person buying the goods deducting the tax at source and depositing the same with the Revenue cannot be said to be ultra vires to TST Act and the Rules as observed and held by the High Court.”

The Court also noted, “Therefore, the High Court has fallen in error in misinterpreting Rule 3A(2) of the TST Rules and has fallen in error in declaring Rule 3A(2) of the TST Rules ultra vires to TST Act and the High Court has materially erred in quashing and setting aside the memorandum issued by the State Government requiring the hirers namely the ONGC and the GAIL to deduct an amount equivalent to 4% out of the respective bills of the suppliers of the vehicles.”

Key Takeaways

• Tax deduction at source is a valid mechanism for the recovery of tax and does not change the primary liability of the dealer to pay tax.
• The transfer of the right to use goods is considered a “sale” under the Tripura Sales Tax Act, 1976, making the transferor liable to pay tax.
• Rule-making power under Section 44 of the TST Act is broad enough to include procedures for tax recovery, including tax deduction at source.
• This judgment clarifies the relationship between the charging provisions and machinery provisions in tax laws.

Directions

The Supreme Court quashed the judgments of the High Court and the Single Judge, thereby upholding the validity of Rule 3A(2) of the Tripura Sales Tax Rules, 1976. The Court directed that necessary consequences should follow.

Development of Law

The ratio decidendi of this case is that tax deduction at source is a valid mechanism for the recovery of tax and does not change the primary liability of the dealer to pay tax. The judgment clarifies that the transfer of the right to use goods is considered a “sale” under the Tripura Sales Tax Act, 1976. This decision overturns the High Court’s view that Rule 3A(2) was ultra vires, thereby reinstating the State’s power to deduct tax at source in such transactions.

Conclusion

The Supreme Court’s decision in State of Tripura vs. Chandan Deb upholds the validity of tax deduction at source on the transfer of the right to use goods under the Tripura Sales Tax Act, 1976. The Court clarified that Rule 3A(2) of the TST Rules is a valid machinery provision for the recovery of tax and does not create a new tax liability. This judgment reinforces the principle that tax deduction at source is a legitimate tool for tax collection, and it does not alter the primary liability of the dealer to pay tax.