2014 (9) TMI 1052 - HC - VAT and Sales Tax

Transfer of right to use - contract for hiring of mud logging services with the ONGC - service contract or contract for hire - VAT or service tax - whether the transactions entered into by the petitioners amount to transfer of right to use any goods and, therefore, they are exigible to tax in terms of Section 4(2) of the Tripura Value Added Tax Act, 2004 read with Rule 7 of the Tripura Value Added Tax Rules, 2005? Held that - there is both an element of service and transfer of right to use goods. It however appears to us that the pre-dominant portion of the contract relates to hiring of services and not to transfer of right to use the goods. We are aware that the dominant nature test is not to be used in composite contracts falling within the ambit of Article 366(29A) but from the reading of the contract it is more than apparent that the intention of the parties was to treat the contract as a contract for hiring of services. Moreover, it is impossible to divide the contract into two separate portions. Every element of the mud logging contract contains a major element of provisions of services. In such an eventuality it is virtually impossible to divide the contract. It is not possible to work out the value of the right to use goods transferred under the contract. In cases, where the contracts are easily divisible or where the parties have by agreement clearly indicated what is value of the service part and what is value of the transfer of right to use goods part, the contract may be divided. We are in agreement with the Delhi High Court that when the contract cannot be divided with exactitude then the Central Law must prevail. Parties have also been paying service tax and if the State is allowed to tax any portion of the value of the contract then there has to be a proportionate refund of the service tax to that extent. This cannot be done without hearing the Union of India. If there is any dispute between the State or the Union of India then they must resolve it between themselves. The petitioners or the ONGC cannot be made liable to pay both the taxes for the same transaction. It is for the State in consultation with the Union of India to come up with the scheme whereby such contracts may be divided but in the absence of any such provision we are clearly of the view that the State has no jurisdiction to levy tax on such a transaction. By operation of law services of renting-a-cab have been brought within the ambit of service tax. This is a Central law which governs the field and renting of cab services has been held to be a service amenable to service tax. The consistent view is that where vehicles are rented out with or without drivers they are amenable to service tax and therefore, no sales tax or VAT can be levied on such transaction. Petition allowed - The State is not entitled to levy any sales tax or Value Added Tax on the transactions in question. It is, therefore, directed that the amount of tax, already deducted and received by the State shall be refunded to the petitioners along with statutory interest latest by 31st December, 2014 - decided in favor of petitioner.

Summary

Issues Involved:
1. Whether the transactions amount to the transfer of the right to use any goods and are exigible to tax under Section 4(2) of the Tripura Value Added Tax Act, 2004.
2. Whether the contracts in question are service contracts or works contracts.
3. Applicability of Article 366(29A) of the Constitution of India.
4. Whether the State can levy VAT on transactions where service tax is already being paid.
5. The dominant nature test and its applicability to composite contracts under Article 366(29A).

Issue-wise Detailed Analysis:

1. Transfer of Right to Use Goods and Taxability:
The main issue is whether the transactions entered into by the petitioners amount to the transfer of the right to use any goods and are therefore exigible to tax under Section 4(2) of the Tripura Value Added Tax Act, 2004, read with Rule 7 of the Tripura Value Added Tax Rules, 2005. The State contends that the contracts involve the transfer of the right to use goods, making them taxable. However, the petitioners argue that these are service contracts, not subject to VAT.

2. Service Contracts vs. Works Contracts:
The court examined two types of contracts: one for mud logging services and the other for hiring vehicles. The mud logging contract involved specialized machines and services provided by the petitioners, treated as a works contract by the State. The vehicle hiring contracts were argued by the petitioners to be service contracts, while the State viewed them as hire contracts for the transfer of the right to use goods. The court noted that the ONGC and GAIL deducted VAT at source, treating the contracts as works contracts under Section 2(36) of the TVAT Act.

3. Applicability of Article 366(29A):
Article 366(29A) of the Constitution, which includes tax on the transfer of the right to use any goods, was discussed. The court referred to the landmark judgment in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., which held that the State could not tax a composite contract of goods and services as a sale of goods. The Constitution was amended to include sub-clauses (a) to (f) in Article 366(29A), broadening the definition of sale to cover various transactions, including the transfer of the right to use goods.

4. VAT vs. Service Tax:
The petitioners argued that they were paying service tax to the Central Government and that the Tripura Value Added Tax Act should give way to the Finance Act of 1994, which imposes service tax. The court noted that the Apex Court in Gannon Dunkerley and Co. Vs. State of Rajasthan held that only the value of goods involved in the execution of works contracts could be taxed, excluding charges for labor and services. The court emphasized that service tax and VAT are mutually exclusive, and both cannot be levied on the same transaction.

5. Dominant Nature Test:
The court referred to the dominant nature test, which determines whether a contract is primarily for the sale of goods or the provision of services. In Bharat Sanchar Nigam Ltd. and another Vs. Union of India and others, the Apex Court held that the dominant nature test does not apply to contracts falling within the ambit of Article 366(29A). The court in the present case found it impossible to divide the contracts into separate portions for services and the transfer of the right to use goods, as every element of the contracts contained a major element of service provision.

Conclusion:
The court concluded that the transactions in question were predominantly service contracts and not subject to VAT. It held that the State could not levy sales tax or VAT on these transactions, as they were already subject to service tax. The court directed the State to refund the amount of tax deducted and received, along with statutory interest, by a specified date. The judgment emphasized the mutual exclusivity of service tax and VAT, and the need to resolve conflicts between Central and State laws in favor of the Central law.