In a recent landmark decision, the Supreme Court has definitively stated that the hiring of motor vehicles or cranes from a contractor should be classified as a service, not a sale of goods, and therefore is exempt from Sales Tax or Value Added Tax (VAT). The critical factor, as outlined by the court, is the retention of control over the equipment by the contractor during the hiring period.
The court clarified that the transfer of the right to use goods encompasses not only possession but also control. If the contractor maintains substantial control over the goods, including providing operational crew, covering fuel, oil, maintenance costs, and assuming responsibility for any loss or damage, then the transaction does not qualify as a sale of goods. In such cases, only service tax can be applied.
The case in question involved the hiring of motor vehicles and cranes by ONGC from contractors, where the contractors retained control over the equipment throughout the contractual period. The central issue was whether such hiring constituted a transfer of the right to use goods, subjecting it to Sales Tax or VAT under Article 366 of the Indian Constitution.
The bench, comprising Justice Abhay S. Oka and Justice Rajesh Bindal, emphasized that for a transfer of the right to use goods, both possession and control must be relinquished to the user. When substantial control remains with the contractor and is not transferred to the user, the transaction qualifies as a service rather than a sale of goods.
Background Facts:
In 2006, M/s. K.P. Mozika entered into a contract with ONGC, providing truck-mounted hydraulic cranes with crew for ONGC’s operations.
The dispute arose when ONGC threatened to deduct tax at source under the VAT Act for the services provided by Mozika. The High Court initially ruled in favor of ONGC, asserting that the contract involved the transfer of the right to use goods, thus attracting liability under the VAT Act and Sales Tax Act.
Supreme Court Verdict:
The Supreme Court bench drew upon the interpretation of Entry 48 of List–II of the Seventh Schedule to the Government of India Act, 1935, and the definition of “sale” in the Sale of Goods Act. The court stressed that the essential element of a sale of goods is the transfer of property and possession.
The introduction of Clause 29A in Article 366 of the Constitution in 1983 allowed for the taxation of the transfer of the right to use goods. The subsequent VAT Act, effective from 2005, conformed to this constitutional provision.
The court referenced Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors (2006) to outline the features required for a transaction to constitute a transfer of the right to use goods. The bench determined that the contracts between the parties, involving the provision of crane services, did not satisfy these criteria.
Conclusion:
The Supreme Court concluded that the contracts for hiring cranes were not covered by the Sales Tax Act and VAT Act. The contracts did not facilitate the transfer of the right to use goods to the person allowed to use them, leading to the allowance of the appeal and the setting aside of the High Court order in favor of M/s. K.P. Mozika.
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