Supreme Court: While hearing a batch of civil appeals against the liability to pay tax under the Assam General Sales Tax Act, 1993 (‘AGST Act’) and the Assam Value Added Tax Act, 2003 (‘VAT Act’), the Division Bench of Abhay S. Oka* and Rajesh Bindal, JJ. answered the issue that whether by hiring motor vehicles/ cranes, there is a transfer of the right to use any goods. The Court held that when the contractor retains the substantial control and does not hand it over to the user, there is no transfer of the right to use the vehicles, cranes, tankers, etc.
Factual Matrix
The common facts surrounding the appeals were that, under a contract, different categories of motor vehicles, such as trucks, trailers, tankers, buses, scrapping winch chassis and cranes were provided to the Oil and Natural Gas Corporation Limited (‘ONGC’). The Indian Oil Corporation Limited (‘IOCL’) also entered into a contract with transporters for providing tank trucks. K.P. Mozika (‘appellant’) provided services of truck mounted hydraulic cranes with crew, etc. to ONGC for carrying out its various operations. The appellant approached the Gauhati High Court on ONGC’s threat to deduct tax at source under the VAT Act in respect of the services provided by the appellant. Several other petitions were filed, raising a similar issue. The High Court dismissed the petitions holding that the contract was for the transfer of the right to use the goods and therefore, there was a liability under the VAT Act and the AGST Act.
Issue
Whether such hiring of motor vehicles would give rise to transfer of the right to use any goods and would amount to a ‘sale’ in terms of Clause 29A(d) Article 366 of the Constitution of India.
Analysis and Decision
The Court referred to State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., (1968) SCC OnLine Sc 17, wherein Entry 48 List II of the Seventh Schedule to the Government of India Act, 1935 and Entry 54 List II to the Constitution of India which provides for ‘taxes on sale of goods’ and it was held that the expression ‘sale of goods’ should be given the same meaning as defined in the Sale of Goods Act, 1930. The Court also cited K.L. Johar & Co. v. Dy. CTO, 1964 SCC OnLine SC 103, wherein a similar view was taken. The Court said the State legislature can levy tax on the sale of goods if there was a sale within the Sale of Goods Act. The Court added that a necessary ingredient of the sale of goods under the Sale of Goods Act is the transfer of property in the goods, which is the subject matter of sale and the transfer of the property in goods must be to the buyer. Further, the Court said that under Entry 92A of List-I of the Seventh Schedule to the Constitution, even the Central legislature is empowered to levy tax on the sale and purchase of goods other than newspapers where such sale or purchase occurs during the course of inter-state trade or commerce.
The Court perused Clause 29A(d) of the Article 366, introduced the concept of “deemed sale” which provides that ‘tax on the sale or purchase of goods” includes a tax on the 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.
The Court noted that the VAT Act came into force with effect from 28-04-2005 and repealed the Sales Tax Act. The Court said that the VAT Act was in conformity with the 46th Amendment to the Constitution of India, which inserted Clause 29A to Article 366. The Court perused Section 2(43)(iv) of the VAT Act which provides an inclusive definition of ‘sale’, as ‘a 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’. The Court said that Clause 29A(d) Article 366 refers not to the transfer of property in the goods to the buyer but to the transfer of the right to use any goods for any purpose for consideration. The Court also said that such ‘transfer of the right to use any goods’ can be for any purpose. The Court stated that “only because a person is allowed to use certain goods of the owner, per se, there is no transfer of the right to use any goods”. Hence, the transaction can be either of transfer of right to use the goods or granting mere permission to use the goods without transfer of the right to use the goods.
The Court relied on 20th Century Finance Corpn. Ltd. v. State of Maharashtra, (2000) 6 SCC 12, wherein, it was held that the levy of tax in accordance with Clause 29A(d) Article 366 is not on the use of goods but on the transfer of the right to use goods and transfer is sine qua non for the right to use any goods. Further, the Court noted that in BSNL v. Union of India, (2006) 3 SCC 1, it was held that even after Clause 29A was introduced, the ingredients of the sale of goods continue to have the same definition as discussed in the case of Gannon Dunkerley & Co. (supra) and the meaning of the term ‘goods’ remained the same.
The Court tested the contract between the parties on the touchstone of the following five tests laid down by Dr. AR Laxmanan, J. in BSNL (supra) that to constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes:
(a) there must be goods available for delivery;
(b) there must be a consensus ad idem as to the identity of the goods;
(c) the transferee should have a legal right to use the goods — consequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee;
(d) for the period during which the transferee has such legal right, it has to be the exclusion to the transferor — this is the necessary concomitant of the plain language of the statute viz. a “transfer of the right to use” and not merely a licence to use the goods;
(e) having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.
The Court noted that the contract between the parties itself provided that there was no transfer of the right to use the crane or other equipment. Referring to the terms of the contract, the Court said that it was apparent that the contractor had an option of replacing the cranes in case one of the cranes was not working properly; the contractor was liable to take care of the legal consequences of using the cranes; maintenance and to pay for consumables like fuel, oil, etc.; only the crew members appointed by the contractor could move the cranes; in case of any mishap or accident, the entire liability will be of the contractor and not of the ONGC. The Court also noted that the use of the cranes provided by the contractor to ONGC was only by way of ‘permissive use’ and the entire control over the cranes was retained by the contractor. Therefore, the Court said that the contract was for providing the service of cranes to ONGC. Hence, the Court held that the five tests laid down in BSNL (supra) were not satisfied in the present case. Thus, the Court held that the High Court’s finding that there was a transfer of the right to use cranes was not correct as the transactions did not satisfy all the five tests.
Similarly, the Court tested the other contracts and found that the tests laid down in BSNL (supra) were not satisfied.
The Court referred to Section 65(105)(zzzzj) of the Finance Act, 1994, which provides that ‘taxable service’ means any service provided or to be provided- to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances.
The Court explained that the ‘transfer of the right to use’ will involve not only possession, which may be granted at some stage after execution of the contract, but also the control of the goods by the user. The Court said that when the contractor retains the substantial control and does not hand it over to the user, there is no transfer of the right to use the vehicles, cranes, tankers, etc. Hence, whenever there is no such control on the goods vested in the person to whom the supply is made, the transaction will be of rendering ‘service’ within the meaning of Section 65(105) (zzzzj) of the Finance Act after the said provision came into force.
Conclusion
The Court allowed the appeals and held that the contracts were not covered by the relevant provisions of the AGST Act and of the VAT Act, as the contracts did not provide for the transfer of the right to use the goods made available to the person who is allowed to use the same.
[K.P. Mozika v. ONGC, 2024 SCC OnLine SC 28, Decided on: 09-01-2024]
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