IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 30.09.2011 Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN and The Honourable Mr.Justice M.JAICHANDREN TC(R). No.507 of 2006 The State of Tamil Nadu represented by the Deputy Commissioner (CT) Chennai (North) Division Greams Road, Chennai 600 006 ... Petitioner -vs- Tvl. Karnataka Bank Limited No. 171, Thambu Chetty Street Chennai 600 001 ... Respondent Tax Case Revision to revise the order of the Sales Tax Appellate Tribunal (Additional Bench), Chennai dated 21.01.2004 in S.T.A.No. 1679 of 2001 against the order passed by the Appellate Assistant Commissioner (CT)-1, Chennai 108, order dated 20.6.2001 and made in AP.32/2001 against the order passed by the Deputy Commercial Tax Officer,Esplanade-1, Assessment Circle, Chennai-108, dated 19.1.2001 and made in TNGST 0100312/1988-99. For Petitioner : Mr.R.Sivaraman, Special Government Pleader For respondent : Mr.N.Sriprakash for M/s.N.Inbarajan ORDER (Order of the Court was made by CHITRA VENKATARAMAN,J) The State has filed the Tax Case (Revision) as against the order of the Tamil Nadu Sales Tax Appellate Tribunal, relating to the assessment year 1998-99. 2. The respondent assessee is a Bank. It entered into an agreement with Hindustan Power Plant Limited, Hosur for importing and leasing of machinery on rental basis. The master lease agreement was entered into on 17.4.1998. Thereafterwards, the respondent/assessee https://hcservices.ecourts.gov.in/hcservices/ ordered for machinery as per the specification of the company – Hindustan Power Plant Limited from the foreign manufacturer/supplier in Japan. While the goods were in transit, the assessee and the company - Hindustan Power Plant Limited entered into a supplementary lease agreement on 31.07.1998, which is stated to be part of the master lease agreement dated 17.4.1998. Since the master lease agreement made no reference as to the purchase order placed with the foreign manufacturer, the Revenue took the plea that the supplementary agreement is totally unconnected with the master agreement. According to the assessee, Hindustan Power Plant Limited placed a purchase order on 15.04.1998 with the Japanese firm for the supply of the machinery with specifications and details mentioned therein. Based on the said order alone, the Japanese firm supplied the machinery through Bill of Lading dated 28.05.1998. 3. In the light of the above-said fact, the assessee took the plea that the movement of goods was occasioned as a result of the agreement. The assessee further pointed that there were no two independent transactions, one between the assessee and the foreign manufacturer and the other between the assessee and the actual user. The assessee claimed that considering the various clauses in the master agreement and the supplementary agreement which are to be read as forming part of the same transaction, the supplemenmtary agreement did not have an independent existence from that of the master lease agreement. The various clauses in both the deeds point out that the agreement had occasioned the imports. In support of this claim, the assessee produced copies of the purchase order, master lease agreement, foreigh supplier's sale invoice, bill of lading and movement of goods to Hosur. 4. The Assesssing Authority, however, viewed that the maser lease agreement dated 12.4.1998 gave the general terms of lease. There were no specifications regarding the machinery agreed to be imported and leased out. Only after the import of the machinery and taken to the lessee's place on 09.07.1998, a specific lease agreement was signed on 31.07.1998 giving details of the machinery with the manufacturer's name, etc. There were hardly any details as regards the machinery to be imported in the master lease agreement and consequently, the claim of the assessee for exemption as falling under Section 5(2) of the Central Sales Tax Act was rejected. 5. Aggrieved by the order of assessment resulting in a demand under the Tamil Nadu General Sales Tax Act, the assessee filed an appeal before the Appellate Assistant Commissioner, who allowed the appeal filed by the assessee. Aggrieved by the said order, the Revenue went on appeal before the Sales Tax Appellate Tribunal. 6. A perusal of the order of the Tribunal shows that it accepted the case of the assessee that the original Bill of Lading clearly https://hcservices.ecourts.gov.in/hcservices/ showed that the import was for and on account of the actual user. Referring to the communication that the actual user had with the assessee, the Tribunal held that starting from the purchase order placed on 15.07.1997 and the prior correspondence that the foreign manufacturer had with the actual user, who, in turn, had his correspondence with the Bank, it was clear that the transactions were in the course of import, not liable to tax as per the decision of the Apex Court reported in [2000] 119 STC 182 – 20TH CENTURY FINANCE CORPORATION LTD. v. STATE OF MAHARASHTRA. Aggrieved by this, the Revenue is on revision before us. 7. Learned Standing Counsel appearing for the Revenue placed heavy reliance on the fact that even though the purchaser might have placed the purchase order as early as 14th July 1997 with the foreign manufacturer, the Master Agreement entered into between the assessee and the lessee made no reference as regards the purchase order or the consideration to be paid in instalments by lessee in respect of its lease agreement. He further pointed out that it is only under the second agreement entered into between the parties by way of supplementary agreement, that the consideration for the lease by way of the instalment payment was mentioned. In other words, one cannot read the master agreement and the supplementary agreement, as referable to one single transaction relatable to the purchase of machinery for and on behalf of the lessee to lead to a finding that the import of the machinery was for and on behalf of the actual user; that the transaction ultimately ended in an agreement to transfer the right to use goods. Thus the delivery taking place inside the State, the question of the assessee having the benefit to deduction under Section 3-A(2)(a) of the Tamil Nadu General Sales Tax Act does not arise. In this connection, he placed reliance on the decision of the Kerala High Court reported in [2009] 23 VST 264 – BPL TELECOM LIMITED v. STATE OF KERALA and [2007] 6 VST 805 – FIRST LEASING COMPANY OF INDIA LIMITED v. STATE OF KERALA, to contend that the facts of the case herein fit in with the decision of the Kerala High Court that the import by the assessee and the transfer of right to use the goods constitute separate transaction by itself. With the delivery of machines thus given to the lessee in Tamil Nadu, the deduction was rightly rejected by the Assessing Officer. 8. Per contra, learned counsel for the assessee placed reliance on the decisions of the Apex Court reported in [2000] 119 STC 182 – 20TH CENTURY FINANCE CORPORATION LTD. v. STATE OF MAHARASHTRA, [2010] 34 VST 509 – K.GOPINATHAN NAIR v. STATE OF KERALA, [2007] 16 VST 193 – SREI INTERNATIONAL FINANCE LIMITED v. STATE OF ORISSA and [2010] 29 VST 265 – TELECOMMUNICATION CONSULTANTS INDIA LIMITED v. CCT, to contend that when the transaction in question viz., lease agreement between the assessee and the lessee was with reference to the purchase order placed by the purchaser/lessee on the foreign supplier, the supplementary agreement cannot be read in isolation and the same has to be looked as https://hcservices.ecourts.gov.in/hcservices/ one single transaction starting from the purchase order placed by the assessee followed by the master lease agreement and the supplementary agreement. When the assessee had proved the link between the import and the lease agreement, rightly the claim was sustained by the first and second Appellate Authority. In the light of the law thus declared by the Apex Court in the decision reported in [2000] 119 STC 182 – 20TH CENTURY FINANCE CORPORATION LTD. v. STATE OF MAHARASHTRA, no exception could be taken to the order passed by the Tribunal. As far as the reliance placed on the decision of the Kerala High Court is concerned, he submitted that the transaction therein cannot be viewed as similar to that of the assessee's case. In any event, after the decision of the Apex Court reported in [2000] 119 STC 182 – 20TH CENTURY FINANCE CORPORATION LTD. v. STATE OF MAHARASHTRA, the said decision cannot be of any assistance to the Revenue. 9. Heard learned counsel appearing on either and considered the material placed on record. 10. It is seen from the documents placed before this Court as well before the authorities below that Hindustan Power Plus Limited, the lessee herein, placed purchase order on 14th July 1997 on Akino Milling Machine Company Limited, Japan for the purchase of two Horizontal Machining Centre. The purchase order gives the details on the model and accessories required. Subsequent to the placement of the order, the lessee entered into a correspondence with the assessee herein for finance arrangement. The correspondence between the lessee and the bank dated 10.4.1998 refers to the approval of lease finance arrangement for the machine to be purchased by the assessee. Confirming that the lessee would enter into lease agreement for financing the import of machines, the lessee requested the assessee to place the purchase order on the overseas supplier in Japan to whom the lessee had already placed Purchase Order. They also enclosed a copy of the purchase order placed with the foreign supplier dated 14th July 1997. Accordingly, on 5.4.1998, the assessee also placed purchase order referring to their lease arrangement with the lessee M/s.Hindustan Power Plus Limited, Hosur. The terms and conditions of placing of the purchase order were also enclosed as annexures. A reading of the same shows that the invoices were to be raised in favour of the assessee's account Hindustan Power Plus Limited. They also requested that the words 'under lease arrangement with the Karnataka Bank Limited, Chennai' be marked in prominent places of equipment. Further, it stipulated that any amendment to the purchase order could be made only with the concurrence of the lessee in writing. The assessee requested the foreign manufacturer/supplier to send one set of documents to Hindustan Power Plus Limited, Hosur on shipment of the machinery. The enclosures therein indicated the price payable for the supply of the machine. Accordingly on 17th April 1998, the assessee and Hindustan Power Plus Limited, the lessee, entered into a master lease agreement. A reading of the same clearly shows that the bank had placed purchase order on https://hcservices.ecourts.gov.in/hcservices/ the manufacturer at the request of lessee towards purchase of equipment and in the event the lessee was unable to firm up with the manufacturer for the equipment to be leased under the agreement within the stipulated time, it was open to the lessor to withhold disbursement of the payment and cancel the same, if the circumstances so necessitate such action. It is also pointed out that the equipment was to be insured in the joint names of the lessor-assessee and the lessee. In terms of the master lease agreement thus entered into, a Bill of Lading was issued in the name of the assessee's account M/s.Hindustan Power Plus Limited, the lessee herein. Even though the master agreement contains the printed clauses, yet, the series of correspondences show that the assessee placed purchase order on the foreign supplier based on arrangement between the assessee and the lessee to have the lease transaction. In terms of the arrangement thus entered into, a supplementary agreement was also entered into to specify the payment schedule by the lessee. 11. The documents filed before the Customs Authority also show the name of the assessee along with lessee and the clearance by the lessee for the purpose of moving the imported machinery to to its factory at Hosur. Thus, a reading of the various documents, viz., purchase order placed by the lessee, followed by the correspondences with the bank and the lessee leading to master lease agreement followed by the import of goods, where the name of the lessee as well as the assessee figuring in, the clearance and the payment by the lessee and thereafterwards supplementary lease agreement entered on 31st July 1998 in terms of the master lease agreement dated 17.4.1998 shows that there is an inextricable link between import and lease transactions. A reading of the supplementary lease agreement shows a reference to the invoice date as well as the reference to the master lease agreement dated 17.4.1998. Once the arrangement between the assessee and the lessee as regards lease agreement got finalised for the purpose of import of machinery, the subsequent documentation is merely a follow up action and it is difficult to read each one of the documents in isolation. When the first of the documents viz., master lease agreement got dovetailed into the purchase order placed by the assessee with the foreign manufacturer/supplier, the subsequent documentation completes the balance of the transaction that the assessee had with the lessee. 12. In the context of the above said facts, one needs to consider the reliance on the decision of the Apex Court reported in [2000] 119 STC 182 – 20TH CENTURY FINANCE CORPORATION LTD. v. STATE OF MAHARASHTRA. In the said decision, the Apex Court referred to the decision of the Constitution Bench in the case of GANNON DUNKERLEY & CO., v. STATE OF RAJASTHAN reported in [1993] 88 STC 204, wherein the Apex Court pointed out that in taxing the deemed sale, the restrictions that are available in the case of normal sale also would have relevance. Thus, confirming the view of the Andhra Pradesh High Court in the decision reported in [1995] 97 STC 330 – I.T.C., CLASSIC FINANCE https://hcservices.ecourts.gov.in/hcservices/ & SERVICES v. COMMISSIONER OF COMMERCIAL TAXES, in the decision reported in [2000] 119 STC 182 – 20TH CENTURY FINANCE CORPORATION LTD. v. STATE OF MAHARASHTRA, the Apex Court rejected the Revenue's plea and pointed out that "to accept the contention of the Revenue that on execution of the master lease, the transfer under Sub-clause (d) is complete, will be to give the revenue the legitimacy to tax the consideration mentioned in the master lease even before the appellants acquire a right to receive the same. This will be not only an unintended consequence of enacting Sub-clause (d) of Clause (29A) but also an improper and unjust action having approval of the Court. " 13. Referring to the definition of 'sale' in Section 2(g) in the Central Sales Tax Act as it existed there, the Apex Court pointed out in paragraph 58 that with the definition of "sale" in the Central Sales Tax Act remaining unamended so as to include the deemed sale on the transaction of transfer of right to use any goods, the provisions of Section 4 of the Central Sales Tax Act could not be applied to such transactions of deemed sale. It further pointed out in paragraph 83 that after the insertion of Clause 29A in Article 366 of the Constitution, the definition of "sale" in Section 2(g) of the Central Sales Tax Act was not amended to conform to the definition of the expression "tax on sale or purchase of the goods". The Apex court further referred to the decision of the Constitution Bench in Gannon Denkerley case reported in 88 STC 204, dealing with the constitutionality of the amendment under Sub Clause (b) of Clause 29A relating to works contract holding that the absence of an amendment to the definition of "sale" contained in Section 2(g) of the Central Sales Tax Act, so as to include transfer of property in goods involved in execution of works contract, does not, in any way, affect the applicability of Sections 3, 4 and 5 and Sections 14 and 15 of the Central Sales Tax Act to sales under the Local Act. Thus the Supreme Court observed: " We have no valid reason to think that the same position will not obtain in a case falling under sub-clause (d). Therefore, the contention that for determining the question as to whether a "sale" is inside one State and outside all other States or whether it is in the course of inter-State trade or commerce, recourse cannot be had to the provisions of sections 3 and 4 of the Central Sales Tax Act, is untenable. " 14. The said decision has been consistently applied in the decision of the Orissa High Court reported in [2008] 16 VST 193 – SREI INTERNATIONAL FINANCE LIMITED v. STATE OF ORISSA as well as the decision of the Uttarkhand High Court reported in [2010] 29 VST 265 – TELECOMMUNICATION CONSULTANTS INDIA LIMITED v. CCT, which are also https://hcservices.ecourts.gov.in/hcservices/ cases of a tripartite agreement, in the sense, that the assessee therein had to comply with the already existing order placed by the actual user for import of goods. Thus, agreeing with the decisions of the Orissa High Court and Uttarkhand High Court, which distinguished the case of the Kerala High Court relied on by the learned standing counsel for the Revenue, we have no hesitation in accepting the submission made by the learned counsel for the assessee. 15. In the decision reported in [2010] 34 VST 509 – INDURE LIMITED v. CTO., the Apex Court considered the phrase "in the course of import" in the matter of transfer of right to use. The facts therein related to imported materials for the purpose of using it in a turnkey project. Applying the decision reported in STATE OF MAHARASHTRA v. EMBEE CORPORATION, BOMBAY [1997] 7 SCC 190 followed in DEPUTY COMMISSIONER OF AGRICULTURAL INCOME-TAX AND SALES TAX, ERNAKULAM v. INDIAN EXPLOSIVES LIMITED [1985] 4 SCC 119 on the meaning expressed 'in the course of import', the Apex Court held that in order that the sale should be one in the course of import, it must occasion the import and to occasion the import there must be integral connection or inextricable link between the first sale following the import and the actual import provided by an obligation to import arising from statute, contract or mutual understanding or nature of the transaction which links the sale to import. Thus applying the said law, we have no hesitation to hold that there is an inextricable link between the master agreement and the supplementary lease agreement on the one hand and the import of specific goods based on the purchase order on the other. The various documents placed by the assessee, in particular the Bill of Lading, indicating the name of Hindustan Power Plant Limited show that the import is linked to the purchase order placed on behalf of Hindustan Power Plant Limited. Thus, but for the purchase order placed by Hindustan Power Plant Limited and later thereon approaching the assessee for financial arrangement, the question of the assessee ever placing any purchase order with the Japanese manufacturer/supplier would not have arisen. The purchase order placed by the assessee with the foreign supplier in turn clearly refers to the purchase order of Hindustan Power Plant Limited with the Japanese firm and the import itself was in connection with the master agreement between the assessee and the lessee. On the arrival of the goods, the clearing agent cleared the goods and delivered it to Hindustan Power Plant Limited. Thus, these facts clearly establish that the receipt of rental by the assessee was on account of the transaction in the course of import, which is not liable to be taxed by the State. 16. Thus, in the light of the decision of the Apex Court on the phrase 'in the course of import' therein and the facts proving on the inextricable link in the import and the lease herein, we have no hesitation in accepting the case of the assessee, thereby rejecting the Revenue's revision. https://hcservices.ecourts.gov.in/hcservices/ 17. In the result, the Tax Case Revision is dismissed. No costs. Sd/ Deputy Registrar /true copy/ Sub Asst.Registrar bg To 1.The Deputy Commissioner (CT), Chennai (North) Division, Greams Road, Chennai 600 006 2. The Sales Tax Appellate Tribunal (Additional Bench), Chennai 3.The Appellate Assistant Commissioner (CT)-1,Chennai-108. 4.The Deputy Commercial Tax Officer, Esplanade-I, Assessment Circle, Chennai-108. +1cc to Special Government Pleader Sr 61783 +1cc to Mr.N.Inbarajan, Advocate Sr 61394 PUR(CO) km/14.11. TC(R). No. 507 of 2006 https://hcservices.ecourts.gov.in/hcservices/