Hiring Of Motor Vehicle Or Cranes Is Not 'Sale Of Goods' If Control Over Equipment Is Retained By Contractor, VAT Can't Be Levied: Supreme Court

The Supreme Court has held that the hiring of motor vehicles/cranes from a contractor is a service and would not attract Sales Tax or Value Added Tax (VAT) assuming the transaction to be sale of goods. The Court clarified that transfer of right to use the goods not only includes possession but also control over goods by the user. If the control over the goods remains with the contractor during the hire period, then it cannot be termed as sale of goods and only service tax can be levied.

The matter concerned hiring of motor vehicles/cranes by ONGC from contractors, wherein the contractors retained control over the goods (motor vehicles/cranes) by providing crew members for operating the cranes, paying for fuel, oil, maintenance and loss or damage to the equipment, staff of contractor, third party or to the ONGC's property. The issue was whether such hiring would cause transfer of right to use the goods and amount to a sale in terms of Clause 29A(d) of Article 366 of the Constitution of India and attract Sales Tax or VAT.

The Bench comprising Justice Abhay S. Oka and Justice Rajesh Bindal, has held that, “Essentially, 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. When the substantial control remains with the contractor and is not handed over to the user, there is no transfer of the right to use the vehicles, cranes, tankers, etc. 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.”

BACKGROUND FACTS

In 2006, M/s. K.P. Mozika v Oil (“Appellant”) entered into an a contract with ONGC (“Respondent”) whereby the Appellant agreed to provide services of truck­mounted hydraulic cranes with crew, etc., to ONGC for carrying out its operations.

The Appellant approached the Guwahati High Court on the threat given by ONGC to deduct tax at source under the Value Added Tax Act, 2005 (“VAT Act”) in respect of the services provided by the Appellant. The Single Judge of High Court dismissed the petition by holding that the contract was for the transfer of the right to use the goods and, therefore, there is a liability under the VAT Act and the Sales Tax Act. In appeal, the Division Bench on 25.11.2009 dismissed the appeal and held that there was a transfer of the right to use the goods covered by the contract.

The Appellant filed an appeal before the Supreme Court against the High Court order dated 25.11.2009. Similar appeals were tagged along.

The Appellant contended that sales tax under VAT Act would not be attracted since there was no transfer of right to use the goods. The hiring of cranes etc. did not fall into definition of deemed sales within Section 2(43)(iv) of VAT Act.

SUPREME COURT VERDICT

The Bench noted that Entry 48 of List–II of the Seventh Schedule to the Government of India Act, 1935 provided for “taxes on sale of goods and on advertisement”. Reliance was placed on the Supreme Court judgment in Gannon Dunkerley & Co, AIR 1958 SC 560, wherein while interpreting Entry 48 of List–II of the Seventh Schedule to the Government of India Act, 1935 and Entry 54 of List­II of the Seventh Schedule to the Constitution of India, it was held that “sale of goods” will have to be given same meaning as defined in Sale of Goods Act, 1930. Therefore, the State legislature was empowered to levy tax on the sale of goods if there was a sale within meaning of the Sale of Goods Act.

The definition of “sale” under the Sale of Goods Act required the transfer of property in goods by any person by cash, deferred payment, or other valuable consideration.

“A necessary ingredient of the sale of goods is the transfer of property in the goods subject matter of sale from the seller to the buyer. The essential ingredient of such a sale is handing over possession of the goods and transferring the property in the goods to the buyer”, the Bench opined.

Through the 46^th Amendment to the Constitution of India, Clause 29A was added to Article 366 with effect from 02.02.1983. Clause 29A concerned tax on the sale or purchase of goods and 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 Sales Tax Act was replaced by the VAT Act which came into force on 28.04.2005. The VAT Act conforms to Article 366 (29A) of the Constitution of India. Section 2(43) of VAT Act defines 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 Supreme Court in Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors, (2006) 3 SCC 1, has held that a transaction must have following features to constitute a transaction for transfer of right to use the goods:

1. Goods available for delivery;
2. Consensus ad idem as to the identity of the goods;
3. Transferee to have legal right to use the goods and legal consequences of such use including permissions or licences;
4. For the period during which the transferee has such legal right, it has to be the exclusion to the transferor; and
5. After transferring right to use the goods, the owner cannot again transfer the same rights to others during the concerned period.

The Bench noted that the contract between Parties is for providing service of cranes to ONGC, as the transferee (ONGC) is not required to face legal consequences for using the cranes supplied by the contractor. It was observed that the transaction did not have the attributes laid down in Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors.

“Though the cranes are used for carrying out the work as suggested by ONGC, the entire control over the cranes is retained by the contractor, inasmuch as it is the contractor who provides crew members for operating the cranes, it is the contractor who has to pay for fuel, oil, etc. and for maintenance of any loss or damage to the equipment of the contractor, staff of the contractor, any third party and staff and property of ONGC. Therefore, we find that as regards the contract to provide cranes, the finding of the High Court that there was a transfer of the right to use cranes was not correct as the transactions do not satisfy all the five tests referred to above.”

The Bench concluded that the contracts are not covered by Sales Tax Act and VAT Act, as the contracts do not provide for the transfer of the right to use the goods made available to the person who is allowed to use the same.

The appeal has been allowed and the High Court Order has been set aside.

Case Title: M/s. K.P. Mozika v Oil and Natural Gas Corporation Ltd. & Ors.

Citation: 2024 LiveLaw (SC) 26

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