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2014 (11) TMI 1070 - HC - VAT and Sales TaxTransfer of right to use - service contract of directional drilling - 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 - The intention of the parties is clearly to treat the agreement as a service agreement and not a transfer of right to use of goods. We are also clearly of the view that it is impossible from the terms of the contract to divide the contract into two portions and since the petitioners have paid service tax they cannot be also asked to pay value added tax. 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 digging directional wells and Mobile Drilling Rig service 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. The transactions do not amount to sale within the meaning of the TVAT Act, 2004 - petition allowed - decided in favor of petitioner.
Issues Involved:
1. Whether the transactions entered into by the petitioners amount to a transfer of the right to use any goods and are thus exigible to tax under Section 4(2) of the Tripura Value Added Tax Act, 2004. 2. Whether the contracts for directional drilling and mobile drilling rig services constitute service contracts or sales. 3. The applicability of Article 366(29A) of the Constitution of India in determining the taxability of the transactions. 4. The implications of the Supreme Court judgments on composite contracts and the dominant nature test. 5. The mutual exclusivity of service tax and value-added tax (VAT) in composite contracts. 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 a transfer of the right to use any goods and are thus exigible to tax under Section 4(2) of the Tripura Value Added Tax Act, 2004. The State contends that these transactions are for hiring machinery, which amounts to a sale within the meaning of Section 2(25)(d) of the Act, making them taxable under Section 4(2). The petitioners argue that they have entered into service contracts and are paying service tax to the Central Government, hence no VAT should be levied. 2. Nature of Contracts for Directional Drilling and Mobile Drilling Rig Services: In W.P(c) Nos. 277 and 278 of 2011, the contracts were for providing directional drilling services, which included hiring machinery and specialized staff. The court found that these contracts predominantly involved the provision of services due to the highly specialized nature of the work and the inclusion of expert personnel. Similarly, in W.P(c) No. 315 of 2010, the court concluded that the mobile rigs remained under the exclusive control of the contractor, indicating that the contracts were for services rather than the transfer of the right to use goods. 3. Applicability of Article 366(29A) of the Constitution: Article 366(29A) includes various types of deemed sales, such as the transfer of the right to use goods. The court referred to multiple Supreme Court judgments, including the 20th Century Finance Corpn. Ltd. case, which clarified that the levy of tax is on the transfer of the right to use goods, not on their use. The court emphasized that the taxable event occurs when the contract for the transfer of the right to use goods is executed. 4. Supreme Court Judgments on Composite Contracts and Dominant Nature Test: The court discussed the Supreme Court's stance in cases like Gannon Dunkerley, Bharat Sanchar Nigam Ltd. (BSNL), and Imagic Creative(P) Ltd., which established that the dominant nature test does not apply to contracts falling under Article 366(29A). Instead, such contracts can be split to determine the value of the service and sale components. However, in the present cases, the court found it impossible to divide the contracts into service and sale portions due to their composite nature. 5. Mutual Exclusivity of Service Tax and VAT: The court reiterated that service tax and VAT are mutually exclusive. It is only the Central Government that can levy tax on services, while the State can levy tax on sales and deemed sales. The court held that since the petitioners had paid service tax, they could not be asked to pay VAT on the same transaction. This principle was supported by the Delhi High Court's judgment in Commissioner, VAT, Trade and Taxes Department vrs. International Travel House Ltd. Conclusion: The court concluded that the transactions in question did not amount to sales within the meaning of the TVAT Act, 2004. The contracts were primarily for hiring services, and it was impossible to divide them into separate portions for service and transfer of the right to use goods. Therefore, the State was not entitled to levy VAT on these transactions. The court directed the State to refund the tax already deducted along with statutory interest by a specified date.
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