A) ABSTRACT / HEADNOTE
The present case concerns the liability of sales tax or service tax on transactions involving the provision of cranes, trucks, and tankers for various functions, particularly for entities like ONGC and IOCL. The primary issue revolves around whether these agreements constitute a transfer of the right to use goods, as per Article 366(29A)(d) of the Constitution of India, which would render them deemed sales and liable for sales tax under the Assam General Sales Tax Act, 1993 and the Assam VAT Act, 2003. Conversely, if these transactions are deemed to be service contracts, they would attract service tax under the Finance Act, 1994. The Court held that in the absence of a complete transfer of control and possession over the equipment to ONGC and IOCL, these contracts were primarily service agreements rather than deemed sales, exempting them from VAT and sales tax but subjecting them to service tax under Section 65(105)(zzzzj) of the Finance Act.
Keywords: Sales Tax, Service Tax, Right to Use, Deemed Sales, Effective Control
B) CASE DETAILS
- i) Judgement Cause Title: M/s. K.P. Mozika v. Oil and Natural Gas Corporation Ltd. & Ors.
- ii) Case Number: Civil Appeal No. 3548 of 2017
- iii) Judgement Date: January 9, 2024
- iv) Court: Supreme Court of India
- v) Quorum: Abhay S. Oka and Rajesh Bindal, JJ.
- vi) Author: Abhay S. Oka, J.
- vii) Citation: [2024] 1 S.C.R. 488 : 2024 INSC 27
- viii) Legal Provisions Involved:
- Constitution of India – Article 366(29A)(d)
- Assam General Sales Tax Act, 1993
- Assam Value Added Tax Act, 2003
- Finance Act, 1994 – Section 65(105)(zzzzj)
- ix) Judgments Overruled by the Case: None explicitly
- x) Case is Related to Which Law Subjects: Taxation Law, Constitutional Law, Contract Law
C) INTRODUCTION AND BACKGROUND OF JUDGEMENT
This case analyzes whether certain transactions related to the leasing of motor vehicles, cranes, and tankers constitute sales (hence subject to sales tax) or services (subject to service tax). The question arose under the Assam VAT Act, 2003 and the Assam General Sales Tax Act, 1993. The appellant, K.P. Mozika, along with other assessees, engaged in contracts to provide various vehicles to ONGC and IOCL for specific operational use. The High Court’s interpretation held these as deemed sales, thereby subjecting them to VAT. However, the appellants contended that since effective control and possession remained with the contractor, these transactions should be classified as services. The Supreme Court, in deciding the appeal, examined the legislative intent behind Article 366(29A) and its application in similar precedents to resolve whether the agreements involved the transfer of the right to use goods.
D) FACTS OF THE CASE
The case comprises multiple appeals where the appellant provided services of cranes, trucks, trailers, tankers, and other motor vehicles to ONGC and IOCL under separate agreements. These agreements outlined that the contractor would retain operational control, including responsibilities for maintenance, staffing, and insurance. The agreements specified that ONGC and IOCL could request certain vehicles for specified purposes but without acquiring any legal control or possession over them. Consequently, the appellant argued that these arrangements were essentially service contracts rather than a sale of goods or transfer of the right to use goods.
E) LEGAL ISSUES RAISED
- i) Does the provision of equipment, such as cranes and tank trucks, constitute a transfer of the right to use goods under Article 366(29A)(d), thereby subjecting the transactions to sales tax under the VAT Act?
- ii) Can such transactions be considered service agreements under Section 65(105)(zzzzj) of the Finance Act, thereby attracting service tax?
F) PETITIONER/APPELLANT’S ARGUMENTS
- The appellants contended that the contracts did not involve a transfer of the right to use since control and possession over the equipment were not passed to ONGC or IOCL. They retained responsibility for the crew, maintenance, and other operational aspects, ensuring that effective control remained with them.
- Relying on BSNL v. Union of India, the appellants argued that for a deemed sale to occur, complete possession and control should be transferred, which was not the case here. They cited that the service nature of the contracts is apparent due to the retention of operational obligations, with ONGC and IOCL having no legal responsibility for the equipment.
- They also referred to the 20th Century Finance Corporation Ltd. v. State of Maharashtra case to emphasize that transfer of the right to use goods necessitates exclusive possession by the transferee, a condition not satisfied in their contracts.
G) RESPONDENT’S ARGUMENTS
- The respondent, represented by the State of Assam, argued that the nature of the contract inherently implied a transfer of the right to use due to the continuous availability of the vehicles and equipment to ONGC and IOCL. This constituted a deemed sale under Article 366(29A)(d), bringing it within the ambit of VAT.
- They cited provisions under the Assam VAT Act and argued that the agreements did not explicitly exclude the transfer of control and possession, thereby inferring that the right to use had been transferred. They relied on the principles from 20th Century Finance Corporation Ltd. to argue that the absence of delivery does not necessarily exclude the transfer of the right to use.
H) RELATED LEGAL PROVISIONS
- i) Constitution of India – Article 366(29A)(d) (transfer of right to use goods)
- ii) Assam General Sales Tax Act, 1993 – Definitions and applicability of sales tax
- iii) Assam Value Added Tax Act, 2003 – Section 2(43) defining “sale” to include deemed sales
- iv) Finance Act, 1994 – Section 65(105)(zzzzj) defining service tax applicability on supply of goods without transferring right of possession and control
I) JUDGEMENT
a. Ratio Decidendi
The Supreme Court ruled that no transfer of the right to use goods had occurred under the contracts since effective control and possession remained with the contractors. The agreements stipulated that all operational responsibilities, including staffing, maintenance, fuel, insurance, and risk coverage, were managed by the contractors. Consequently, the arrangements did not satisfy the requirements of Article 366(29A)(d) and thus were not deemed sales liable to VAT.
b. Obiter Dicta (If Any)
In the decision, the Court referenced Bharat Sanchar Nigam Ltd. v. Union of India, reiterating that the transfer of the right to use necessitates an exclusive transfer of control to the hirer. The Court further clarified that partial or limited control retained by the owner does not fulfill the conditions for a deemed sale.
c. Guidelines (If Any)
- For a deemed sale to occur under Article 366(29A)(d), there must be a complete transfer of possession and control of goods to the transferee.
- When significant operational obligations and risks are retained by the contractor, the contract likely constitutes a service agreement rather than a sale.
- Tax authorities must assess control and responsibility elements within agreements to determine whether transactions fall under sales tax or service tax obligations.
J) CONCLUSION & COMMENTS
The Supreme Court’s decision emphasizes the importance of effective control and possession in determining whether a contract constitutes a deemed sale or service agreement. The Court’s interpretation reinforces the principle that legal control and possession must entirely shift to the hirer for a transaction to qualify as a sale under Article 366(29A)(d). This judgment delineates the boundary between sales tax and service tax, providing clarity on contractual arrangements in service-oriented industries. The decision is instrumental in guiding future cases involving equipment leasing and service contracts, establishing a precedent in taxation matters.
K) REFERENCES
- Bharat Sanchar Nigam Ltd. v. Union of India, [2006] 2 SCR 823.
- Great Eastern Shipping Company Ltd. v. State of Karnataka, (2020) 3 SCC 354.
- 20th Century Finance Corporation Ltd. v. State of Maharashtra, (2000) 6 SCC 12.
- Imagic Creative (P) Ltd. v. Commissioner of Commercial Taxes, (2008) 2 SCC 614.
- Sales Tax Officer, Pilibhit v. Budh Prakash Jai Prakash, AIR 1954 SC 459.
