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TMI Blog2014 (9) TMI 1052X X X X Extracts X X X X X X X X Extracts X X X X ..... ntains 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 absenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions, along with services of drivers etc. According to the petitioners it is entirely a service contract whereas according to the State it is an out and out contract for hire or transfer of right to use goods. It would be pertinent to mention that in all the cases the ONGC or GAIL deducted VAT at source from the bills of the petitioners showing the contracts to be work contracts within the meaning of Section 2(36) of the TVAT Act. All the petitioners urge that the contracts were not works contracts within the meaning of Section 2(36) of the TVAT Act and therefore, the deduction of tax was totally incorrect. On the other hand, the stand of the State is that though the contracts may not be works contract they are still exigible to tax because by the contracts the right to use goods has been transferred. [4] At this stage it would be pertinent to refer Article 366(29A) of the Constitution of India which reads as follows: 366(29A) tax on the sale or purchase of goods includes- (a) a tax on the transfer, otherwise than in pursuance of a contact, of property in any goods for cash, deferred payment or other valuable consideration; (b) a tax on the transfer of property i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Constitution with a view to widen the definition of sale as traditionally understood. In common law, sale was understood to mean an agreement to transfer title in the goods on payment of consideration. The Constitution was amended and sub article (29A) was introduced in the Constitution by the Constitution Forty-sixth Amendment Act, 1982. By means of this Constitutional amendment, tax on the sale or purchase of goods now covered six more categories which may otherwise not have fallen within the definition of sale. Sub-clauses (a) to (f) to Clause 29A of Article 366 of the Constitution bring within the ambit of sale, transactions where one or more of the essential ingredients of sale as traditionally understood were absent. By legal fiction such transactions, transfers and supply of goods were deemed to be sale and purchase of the goods. [8] After amendment of the Constitution the Apex Court in Gannon Dunkerley and Co. Vs. State of Rajasthan: 1993(1) SCC 364 dealing with works contracts held that only the value of the goods involved in the execution of works contract could be taxed and this would have to be determined by taking into account the value of the entire works contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of tax at the time of payment- Every person responsible for paying) any sum to any person on account of works contract and right to use any goods for any purpose, shall at the time of credit of such sum to account of the person or at the time of payment thereof in cash or by issue of a cheque or draft or any other mode, deduct such amount towards sales tax (not being more than the total tax payable by the dealer) as may be prescribed. ***** ******* ******* ******* ****** ****** Rule 7(2) of the TVAT Rules reads thus: 7(2) Every person responsible for making payment to any person for discharge of any liability on account of valuable consideration payable for any transfer of the right to use any goods other than the goods in exempted list of the Act for any purpose (whether or not for a specified period) for cash or in any manner, shall at the time of making such payment deduct an amount at the rate as notified by the Government from time to time of the payment on account of such transfer of right : provided that till the Government notify the rate, the prevailing rate shall continue : Provided no such deduction shall be made from the bill(s) or invoice(s) of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court has been shown on behalf of respondents that there would be no completed transfer of right to use goods unless the goods are delivered. Thus, the delivery of goods cannot constitute a basis for levy of tax on the transfer of right to use any goods. We are, therefore, of the view that where the goods are in existence, the taxable event on the transfer of the right to use goods occurs when a contract is executed between the lessor and the lessee and situs of sale of such a deemed sale would be the place where the contract in respect thereof is executed. Thus, where goods to be transferred are available and a written contract is executed between the parties, it is at that point situs of taxable event on the transfer of right to use goods would occur and situs of sale of such a transaction would be the place where the contract is executed. According to the Apex Court the taxable event on the transfer of right to use goods would be the place where the contract is executed. In the case of M/s. Oil field Instrumentation (India) Ltd., the contract was executed in Maharastra whereas in other cases the contracts were executed within Tripura. [11] The Apex Court in Rainbow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed sophisticated machines to the contractors for being used in execution of the contracted works. The Rashtriya Ispat Nigam Ltd. received hire charges for the same. The tax was levied on this transaction on the ground that there was a transfer of the right to use goods. The Andhra Pradesh High Court in its judgment held that there was no transfer of the right to use this machinery in favour of the contractor. While coming to this conclusion the High Court of Andhra Pradesh analysed the various clauses of the agreement and held that the contractors were not free to make use of the machinery for works other than the project work of the respondent or move out the machinery during the period of contract. The Court went on to hold that the condition that the contractor would be responsible for the custody of the machinery while it was on the site did not militate against the possession and control of the Ispat Nigam over the property. The Apex Court upheld the judgment of the High Court of Andhra Pradesh. [13] In Bharat Sanchar Nigam Ltd. and another Vs. Union of India and others, (2006) 3 SCC 1 the Apex Court was dealing with the issue as to whether the transaction by which mobile p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarly the title to the goods under Subclause (d) remains with the transferor who only transfers the right to use the goods to the purchaser. In other words, contrary to A.V. Meiyappan decision a lease of a negative print of a picture would be a sale. Sub-clause (e) covers cases which in law may not have amounted to sale because the member of an incorporated association would have in a sense begun as both the supplier and the recipient of the supply of goods. Now such transactions are deemed sales. Sub-clause (f) pertains to contracts which had been held not to amount to sale in State of Punjab vs. M/s. Associated Hotels of India Ltd. (supra). That decision has by this clause been effectively legislatively invalidated. 42. All the sub-clauses of Article 366 (29A) serve to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dunkerly limited. The amendment especially allows spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be:- Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is 'the substance of the contract . We will, for the want of a better phrase, call this the dominant nature test. [15] Thereafter the Court dealt with the question as to whether the dominant nature test would continue to apply even in respect of contracts falling within the ambit of Clause 29A of the Constitution. The Apex Court held as follows: 49. We agree. After the 46th Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature test applying. Therefore when in 2005, C.K. Jidheesh vs. Union of India (2005) 13 SCC 37 held that the aforesaid observations in Associated Cement (2001) 4 SCC 593 were merely obiter and that Rainbow Colour Lab (2000) 2 SCC 385 was still good law, it was not correct. It is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so supplied the advertising material to its customers. It raised bills under two heads; (1) the bills raised for conceptualizing and designing were treated to be in the nature of service and service tax was paid on the same. (2) With regard to the goods it supplied to its customers, the company treated the said transaction as sale and paid sales tax on the same. When the matter came up before High Court it rejected the plea of the assessee holding that the contract was a comprehensive contract for supply of printed material developed by the company. The High Court held that the indivisible contract was divided by the company under different heads. The Apex Court after discussing all the relevant law on the point including the judgments which we have referred to hereinabove set aside the judgment of the High Court and held as follows: 27. What, however, did not fall for consideration in any of the aforementioned decisions is the concept of works contract involving both service as also supply of goods constituting a sale. Both, in Tata Consultancy (2005) 1 SCC 308 as also in Associated Cement Company (2001)4 SCC 593, what was in issue was the value of the goods and only for the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of both the acts are made applicable. 32. Payments of service tax as also VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract, irrespective of the element of service provided. The approach of the assessing authority, to us, thus, appears to be correct. [19] The Apex Court in BSNL s case clearly held that in a contract falling under Clause 29A of Article 366 of the Constitution the dominant nature test would not apply and the contract could be split up to determine the value of that part of the contract which amounted to services and that portion of the contract which amounted to a deemed sale. This aspect has been also explained in Imagic Creative(P) Ltd. case. The Apex Court has clearly taken a view that the service part of the contract cannot be taxed by the State. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must be given to the taxing entries, however in substance if the statute is not referable to a field given to the State, then the Court will not by a principle of interpretation allow a statute to include in its field what is not covered in its field. The aspect theory (viz. the aspect of goods in composite contracts) would not apply to enable the value of the services to be included in the sale of the goods or the price of the goods in the value of the service. 11. The conclusion, therefore, which emerges with respect to the facts of the present case on applying the ratio of the BSNL s case is that, since the contract in question is a composite contract of sale of goods and services, clearly, it is not permissible for the State Legislature by applying DVAT Act to tax composite contracts comprising of both goods and services. Not only the contracts cannot be artificially split up so as to enable the sale element to be taxed, further, the States cannot treat the contract as only a contract of sale of goods and tax the whole value of the transaction as a sale of goods. Since the parties have not intended the contract to be mutilated/severable inasmuch as no different values are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of right of use and the other for service with respective values attached thereto is lacking, the bargain would catapult beyond the purview of the Act, thus, rendering the same in exigible to tax thereunder. To reiterate, the learned counsel for the Revenue in course of the arguments on a dialectical scrutiny of the clauses of the contract agreements has admitted the same to constitute indivisible contracts.**** However, dealing with the Dipak Nath s case the learned Single Judge held that the facts of that case were different and distinguished the said judgment. [23] A Division Bench of the Agartala Bench of the Gauhati High Court dealt with a similar question in HLS Asia Ltd. Vrs. State of Tripura and Ors; (2011) 5 GLR 277. In this case, the Court was dealing with a case where the contract was for well logging, perforating and other wire line services and the question was whether such a transaction amounts to transfer of right to use any goods. The Division Bench held as follows: 47. Of all the different kinds of composite transactions, the drafters of the Forty-sixth Amendment chose three specific situations, a works contract , a hire-purchase contract and a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as a dealer under the TVAT Act. [25] On the contrary, in two other Division Bench judgments of the Gauhati High Court in Motlib Ali Vrs. ONGC and others (W.P(C) No.5280 of 2011 decided on 24.07.2012) and M/s. Brahmaputra Valley Construction and Suppliers Vrs. ONGC and others (W.P(C) No. 578 of 2009 delivered on 24.07.2012) the Court has come to the conclusion that on consideration of various factors the transaction clearly involved, a transaction for right to use. [26] Coming to the facts of the present case, we shall first deal with the W.P(C) No.75 of 2013 which relates to mud logging services. The NIT was flouted on all India basis at Bombay and the contract was entered into at Bombay. The ONGC was desirous of hiring number of mud logging units along with services of the contractors. The relevant portions of the contract and the terms and conditions are as follows: 1.5 CONTRACTOR S Crew. a) for Segment I : Crew for each Mud Logging Unit consists of 2(two) Mud Loggers, 1(One) Maintenance Engineer, 1(One) Sample catcher (Sample catcher deployment during operating mode only), with requisite qualifications and experience as per Scope of Work to perform work are to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for equipments mobilization at ONGC base within 70 days from the date of issue of Mobilization Order or on mobilization date indicated on order (beyond 70 days) from ONGC. Contractors responsibility have also been mentioned and the contractor is responsible for carrying out preventive and back ground maintenance. Clauses 21 and 23 read as follows: 21. Exclusive Responsibility: In the performance of the Work, the CONTRACTOR is an independent contractor and shall be exclusively responsible for the means , manner and method of performing such Work, with the exclusive direction and control of and responsibility for and to its personnel, taking into account any instructions and/or guidelines from the CORPORATION. ***** ***** ****** ****** ****** ****** ***** 23. Independent Contractor: 23.1 The CONTRACTOR shall act as an independent CONTRACTOR while performing the Work. 23.2 All employees, representatives or subcontractors engaged by the CONTRACTOR in performing the Work shall be under the complete control of the CONTRACTOR and shall not be deemed to be employees of the CORPORATION. 23.3 The CONTRACTOR shall be solely responsible for the acts, defaults or negligence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OF UNITS ORDERED 7 NOS. ELEMENT DESCRIPTION OF CHARGES UNIT OF MEASUREMENT RATE PER MLU IN RUPEES A Mobilisation Charges(inclusive of Charges for crew, expertise/consultancy, maintenance, spares, consumables, all taxes and duties except service tax) Per Occasion per unit NIL B Operative Day s Charges (inclusive of Charges for crew, expertise/consultancy, maintenance, spares, consumables, all taxes and duties except service tax) Per day per mud logging unit Rs.24,381/- (Rupees Twenty Four Thousand Three Hundred Eighty one only) C Standby Day s Charges(inclusive of Charges for crew, expertise/consultancy, maintenance, spares, consumables, all taxes and duties except service tax) Per day per mud logging unit Rs.12,150/- ( Rupees Twelve thousand one Hundred fifty only) per day. D Standby Charges under breakdown condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts service tax. These are elements of service and not only transfer in the right to use goods. Similar language is employed in Elements B , C , D and F . Under element G service tax if payable has to be in addition to the contractor. As pointed above, service tax is actually being paid. [30] As has been held by the Apex Court either a transaction shall be exigible to sales tax/VAT or it shall be exigible to service tax. Both the taxes are mutually exclusive. Whereas sales tax and value added tax can be levied on sales and deemed sales only by the State, it is only the Central Government which can levy service tax. No person can be directed to pay both sales tax and service tax on the same transaction. 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. As held by the Delhi High Court in Commissioner, VAT, Trade and Taxes Department vrs. International Travel House Ltd.(supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ace where the agreement was entered and not where the goods were delivered. [33] As far as the remaining cases are concerned they all relate to hiring of vehicles. The contracts in question fall totally within the ambit of rent-a-cab operator services as per Section 65 of the Finance Act, 1994 as amended under the Rent-a-Cab operator service with effect from 16.07.1997. By operation of law such 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. [34] In view of the above discussion, we are clearly of the view that all the writ petitions have to be 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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