Supreme Court Upholds Tax Deduction at Source on Transfer of Right to Use Goods: State of Tripura vs. Chandan Deb (2023) INSC 284 (24 March 2023)

Date of the Judgment: 24 March 2023
Citation: (2023) INSC 284
Judges: M. R. Shah, J., Krishna Murari, J.
Can a state government mandate tax deductions at source on payments for the transfer of the right to use goods, even if the primary tax liability rests with the dealer? The Supreme Court of India recently addressed this question in a case concerning the Tripura Sales Tax Act, 1976. The court examined whether Rule 3A(2) of the Tripura Sales Tax Rules, 1976, which allows for tax deduction at source (TDS) on the transfer of the right to use goods, was valid. The bench, comprising Justices M. R. Shah and Krishna Murari, delivered the judgment, with Justice Shah authoring the opinion.

Case Background

The case originated from a dispute over the deduction of sales tax at source by companies like ONGC, GAIL, and FCI when hiring vehicles from various suppliers in Tripura. The State of Tripura, through its Revenue Department, had issued a memorandum in 1992 directing a 4% tax deduction at source on payments for the transfer of the right to use goods, as per Section 3A of the Tripura Sales Tax Act, 1976 (TST Act).

The vehicle suppliers, who were the original writ petitioners, challenged the legality of Rule 3A(2) of the Tripura Sales Tax Rules, 1976 (TST Rules) in writ petitions before the High Court. They argued that there was no provision under the TST Act to levy sales tax on the transfer of the right to use goods. They also sought a refund of the amounts deducted. The State of Tripura contended that these transactions were “sales” under the TST Act and that Rule 3A(2) was a valid mechanism for tax recovery.

Timeline

Course of Proceedings

The learned Single Judge of the High Court declared Rule 3A(2) of the TST Rules as ultra vires the TST Act, agreeing with the suppliers that there was no charging provision for tax on the transfer of the right to use goods. However, the Single Judge also held that the suppliers were liable to pay sales tax under Section 3AA of the TST Act.

Both the State of Tripura and the vehicle suppliers appealed the decision. The Division Bench of the Gauhati High Court 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 High Court held that the sales tax could only be levied on the sale of taxable goods by a registered dealer and that the suppliers in this case were not registered dealers.

The State of Tripura then appealed to the Supreme Court of India, which granted leave and framed the question of law as to whether Rule 3A(2) could be declared ultra vires given the express proviso in Section 3(1) of the TST Act for a 4% sales tax on the transfer of the right to use goods.

Legal Framework

The Supreme Court examined several key provisions of the Tripura Sales Tax Act, 1976 (TST Act) and the Tripura Sales Tax Rules, 1976 (TST Rules).

• Section 2(b) of the TST Act defines a “dealer” as 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 in Tripura, and includes any person making a sale under Section 3A.
• Section 2(g) of the TST Act defines “sale” to include any transfer of property in goods for cash or deferred payment or other valuable consideration, and specifically includes “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”. Such a transfer is deemed a sale by the person making the transfer, and a purchase by the person receiving the transfer.
• Section 3(1) of the TST Act is the charging section, stating that every dealer in taxable goods shall pay a tax on his turnover at the rate specified in the schedule. A proviso to this section, inserted by the Tripura Sales Tax (Fourth Amendment) Act, 1987, specifies 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 payments to any person liable to pay tax under Section 3A.
• Section 44 of the TST Act grants the State Government the power to make rules for carrying out the purposes of the Act.
• Rule 3A(2) of the TST Rules states that “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…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”.

The Court noted that the TST Rules were enacted in exercise of the powers under Section 44 of the TST Act and were placed before the Legislative Assembly.

Arguments

Arguments by the State of Tripura

• The State argued that Rule 3A, which provides for tax deduction at source, is a machinery provision related to the tax leviable under the TST Act. It is a mechanism for depositing tax in a sale transaction and does not change the person liable to be taxed or the tax liability.

• The State contended that the transaction of hiring vehicles falls under the definition of “sale” under Section 2(g) of the TST Act, as it involves the transfer of the right to use goods.

• The State submitted that the supplier of the vehicles falls within the definition of “dealer” under Section 2(b) of the TST Act, as they are “selling” taxable goods by transferring the right to use them.

• The State argued that Section 3(1) is the charging section under the TST Act, making the dealer liable for payment of tax, and the proviso specifies a 4% tax on the transfer of the right to use goods.

• The State claimed that the rule-making power under Section 44 is wide enough to cover the procedure for recovery, including tax deduction at source. Therefore, Rule 3A(2) is a valid machinery provision.

• The State argued that Rule 3A(2) does not change the liability to pay tax but only provides a mechanism where the person buying the goods deducts tax at source and deposits it with the revenue.

• The State relied on PILCOM vs. CIT, (2020) 19 SCC 409 and CIT vs. Eli Lilly & Co. (India) (P) Ltd., (2009) 15 SCC 1 to support its argument that provisions for deduction of tax at source are machinery provisions independent of the charging provisions.

• The State contended that the TST Act and Rules fulfill all the requirements for a valid taxing statute as laid down in CCE & Customs vs. Larsen & Toubro Ltd., (2016) 1 SCC 170, which stipulates four components for a valid levy of tax: (i) character of the imposition, (ii) indication of the person liable to pay, (iii) rate of tax, and (iv) measure or value to which the rate is applied.

Arguments by the Vehicle Suppliers

• The vehicle suppliers argued that the High Court correctly declared Rule 3A(2) ultra vires to the TST Act, as there is no charging provision in the TST Act for tax deduction at source on the transfer of the right to use goods.

• The suppliers contended that sales tax can be levied only on the sale of taxable goods by a registered dealer, and they were not registered dealers under the TST Act.

• They argued that the TST Act has a charging section for works contracts but lacks one for the transfer of the right to use goods.

• The suppliers submitted that they were not dealers, had not sold any goods, and the transfer of the right to use goods was not of taxable goods, therefore, deduction of sales tax at 4% was not valid.

• They highlighted that the State Government/companies had refunded the deducted amounts to most vehicle suppliers during the pendency of the case.

• The suppliers argued that what cannot be done under the provisions of the Act cannot be done indirectly through rules, as rules cannot supersede the provisions of the Act.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following question of law:

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

Authorities

Cases

• PILCOM vs. CIT, (2020) 19 SCC 409: The Supreme Court considered this case to support the argument that provisions for deduction of tax at source are machinery provisions independent of the charging provisions.
• CIT vs. Eli Lilly & Co. (India) (P) Ltd., (2009) 15 SCC 1: This case was used by the State to support the argument that provisions for deduction of tax at source are independent of charging provisions.
• CCE & Customs vs. Larsen & Toubro Ltd., (2016) 1 SCC 170: The Court referred to this case to highlight the four components for a valid levy of tax, which are (i) character of the imposition, (ii) indication of the person liable to pay, (iii) rate of tax, and (iv) measure or value to which the rate is applied.

Legal Provisions

• Section 2(b) of the TST Act: Defined “dealer” to include any person selling taxable goods.
• Section 2(g) of the TST Act: Defined “sale” to include the transfer of the right to use goods.
• Section 3(1) of the TST Act: The charging section, which includes a proviso for a 4% tax on the transfer of the right to use goods.
• Section 3AA of the TST Act: Provided for deduction of tax at the time of payments.
• Section 44 of the TST Act: Granted the State Government the power to make rules for carrying out the purposes of the Act.
• Rule 3A(2) of the TST Rules: Mandated the deduction of 4% tax at source on payments for the transfer of the right to use goods.

Authority Usage Table

Judgment

Treatment of Submissions

Treatment of Authorities

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the TST Act and Rules, particularly the charging section and the rule-making power. The Court emphasized that Rule 3A(2) is a machinery provision designed to facilitate the collection of tax, and it does not alter the tax liability. The Court also considered the legislative intent behind the proviso to Section 3(1), which specifically imposes a 4% tax on the transfer of the right to use goods.

Sentiment Analysis of Reasons

Fact:Law Ratio

The court’s reasoning was predominantly based on the legal interpretation of the TST Act and Rules, with a lesser emphasis on the factual aspects of the case. The ratio of fact to law indicates that the legal considerations weighed significantly more in the court’s decision.

Logical Reasoning

The Court rejected the argument that Rule 3A(2) was ultra vires, emphasizing that the proviso to Section 3(1) of the TST Act explicitly provides for a 4% tax on the transfer of the right to use goods. The Court also held that the transfer of the right to use goods is a “sale” under Section 2(g) of the TST Act.

The Court explicitly stated that “Rule 3A(2) can be said to be a recovery machinery/mechanism.” It further clarified that “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 also noted that “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 considered alternative interpretations but rejected them. The High Court’s view that there was no provision for tax deduction at source under the TST Act was deemed fallacious. The Court clarified that Rule 3A(2) is a valid mechanism for tax recovery and does not change the tax liability.

Key Takeaways

• ✓ Tax deduction at source on the transfer of the right to use goods is a valid mechanism for tax recovery.
• ✓ Rule 3A(2) of the Tripura Sales Tax Rules, 1976, is not ultra vires the Tripura Sales Tax Act, 1976.
• ✓ The transfer of the right to use goods is deemed a “sale” under the Tripura Sales Tax Act, 1976.
• ✓ The person transferring the right to use goods is considered a “dealer” and is liable for tax.
• ✓ Machinery provisions for tax recovery do not change the fundamental tax liability.
• ✓ Rule-making power under a statute is wide enough to cover the procedure for tax recovery.

Implications

The Supreme Court’s judgment has significant implications for businesses and state governments.

• For Businesses: Companies that transfer the right to use goods need to be aware that they are liable to pay tax on such transactions. They must also comply with the tax deduction at source requirements.
• For State Governments: The judgment clarifies that states have the power to mandate tax deduction at source on the transfer of the right to use goods. This provides a clear legal basis for state governments to collect taxes on such transactions.
• For Tax Authorities: The judgment affirms that tax deduction at source is a valid mechanism for tax recovery and that such provisions are machinery provisions independent of the charging provisions.
• For Legal Practitioners: The ruling provides clarity on the interpretation of tax laws relating to the transfer of the right to use goods and the validity of rules framed for tax recovery.

Conclusion

The Supreme Court’s ruling in State of Tripura vs. Chandan Deb (2023) INSC 284 is a crucial judgment that upholds the validity of tax deduction at source on the transfer of the right to use goods. The Court clarified that Rule 3A(2) of the Tripura Sales Tax Rules, 1976, is a valid machinery provision for tax recovery and that the transfer of the right to use goods is a “sale” under the Tripura Sales Tax Act, 1976. This decision provides clarity on the legal framework for tax collection on such transactions and has significant implications for businesses and state governments.