Transfer of right to use: analysis in a federal structure

By Kumar Visalaksh and Shailesh Gadre, Economic Laws Practice

The 46th amendment to the constitution of India, carried out in February 1983, was effected to overcome judgments that had disallowed the levy of sales tax by states on transactions which did not conform to the traditional concept of sale i.e. transactions in the nature of a works contract.

The legislature saw such positioning by the courts as restrictions on the state’s power to impose sales tax.

Kumar Visalaksh Manager Economic Laws Practice
Kumar Visalaksh
Economic Laws Practice

Consequently, article 366(29-A) was inserted by which six transactions which in common parlance would not be treated as sale were termed as “sale”. One of these circumstances was the “transfer of right to use any goods” as inserted by clause (d) of article 366(29-A) to the constitution.

Contrary to the belief that with the 46th amendment, the ghost of the indivisible contract and its taxability has been put to rest forever, the amendment has lead to numerous litigations and divergent interpretations of the concept of “deemed sales”.

However, this article explores the complexities involved in interpretation of clause (d) to article 366(29-A), namely, transfer of right to use in the indirect tax regime.

An evolving concept

After the 46th amendment, the definition of the term “sale” under various state value-added tax (successor to sales tax law) legislation has been expanded to include “the transfer of right to use goods”. However, this legislation is silent as to what constitutes a transfer of right to use so as to attract VAT.

Left to the courts, the term was subjected to various interpretations and varied tests were evolved.

Rashtriya Ispat Nigam case

It was only in 2002 that the Supreme Court of India in its landmark decision in State of Andhra Pradesh v Rashtriya Ispat Nigam condensed the test for constituting “transfer of right to use” to effective possession and control.

The Supreme Court held that so long as the possession and effective control over the goods lies with the owner and only a restrictive right is given to the customer, there cannot be transfer of the right to use any goods. In effect, such transactions cannot be subjected to state VAT.

The decision in Rashtriya Ispat Nigam had more or less settled the issue and over the years it has been relied upon in a plethora of cases to determine when “transfer of right to use” can be said to take place in a transaction and accordingly the levy of VAT.

Shailesh Gadre Manager Economic Laws Practice
Shailesh Gadre
Economic Laws Practice

Sale or service?

Historically, the determination of transfer of right to use in a transaction was done from the perspective of the levy of VAT. However, the experience of the last few years shows that the determination has been sought for taxability of the transaction as sales (by states) as well as services (by the federal government). This is because unlike other countries, which have a unitary VAT/goods and services tax (GST) system in place, India does not as yet have a single, integrated VAT/GST system that is applicable to both the supply of goods and the rendition of services.

Battles between governments

This in turn leads to confrontations between the federal government and the state government, which seek to tax the same transaction on various interpretations of transfer of right to use as service and sales.

The Supreme Court sought to play the arbitrator through its decision in Bharat Sanchar Nigam Limited v Union of India by holding that service tax and VAT are mutually exclusive taxes and that the value of the same transaction cannot be subjected to both service tax and VAT.

However, the matters in litigation remain unabated.

The issue has further been complicated by the federal government that added new taxable service entries in the service tax (Finance Act, 1994). These include supply of tangible goods services and works contract services.


The uncertainty involved over the treatment of the transaction of transfer of right to use as one of sales or service, has led to multiple demands of service tax and sales tax on the same transaction.

This has at times led to an enormous tax burden on the assessee and, unfortunately, defeats the very purpose of the introduction of clause (d) to article 366(29-A). A way forward on the issue can be expected only after the introduction of the GST model in India.

Economic Laws Practice is a full-service law firm headquartered in Mumbai and has offices in New Delhi, Pune and Ahmedabad. Kumar Visalaksh and Shailesh Gadre are associate managers with the firm in Mumbai. They can be reached at and


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