2002 (3) TMI 705 - SC - VAT and Sales Tax

Whether there was a transfer of right to use the machinery by the respondent in favour of the contractors by collecting hire charges looking to the clauses contained in the agreement? Held that - Appeal dismissed. On a careful reading and analysis of the various clauses contained in the agreement and, in particular, looking to clauses 1, 5, 7, 13 and 14, it becomes clear that the transaction did not involve transfer of right to use the machinery in favour of contractors. The High Court was right in arriving at such a conclusion.

Summary

Issues:
Interpretation of Section 5-E of the Andhra Pradesh General Sales Tax Act, 1957 regarding the tax liability on hire charges for the transfer of right to use machinery.

Analysis:
The judgment primarily deals with the interpretation and application of Section 5-E of the Andhra Pradesh General Sales Tax Act, 1957 in the context of tax liability on hire charges for the transfer of the right to use machinery. The appellant contended that the respondent was liable to pay sales tax under Section 5-E due to the transfer of the right to use machinery to contractors by collecting hire charges as per the agreement clauses. On the other hand, the respondent argued against the tax liability by highlighting the clauses of the agreement.

The respondent, who owned the Visakhapatnam Steel Project, allocated different works to contractors and provided them with sophisticated machinery for project execution in exchange for charges. The appellant imposed provisional assessment on hire charges under Section 5-E, leading the respondent to file a writ petition challenging the tax levy. The High Court examined the agreement clauses and concluded that there was no transfer of the right to use machinery to contractors, thus absolving the hire charges from sales tax liability.

The High Court's decision was supported by a detailed analysis of various clauses in the agreement, emphasizing that the transaction did not involve the transfer of the right to use machinery to contractors. The court noted that the respondent retained effective control over the machinery even while in the contractor's possession, indicating no transfer of right to use. Additionally, the Appellate Deputy Commissioner's earlier order for different assessment years also supported the conclusion that there was no transfer of right to use machinery.

Ultimately, the Supreme Court upheld the High Court's decision, stating that the appeal lacked merit. The court affirmed that the hire charges were not exigible to sales tax due to the absence of a transfer of the right to use machinery as per Section 5-E. The parties were directed to bear their respective costs, and the appeal was dismissed.

This judgment provides a significant legal interpretation of the tax implications related to the transfer of the right to use machinery under Section 5-E of the Act, emphasizing the importance of analyzing the terms of agreements to determine tax liability accurately.