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TMI Blog2016 (2) TMI 1152X X X X Extracts X X X X X X X X Extracts X X X X ..... the rates for hiring of machinery but also for the staff and the services provided by the staff. After carefully going through the contract we are of the view that the contract is mainly for hiring of services. There may be a very small element of transfer of right to use goods but according to us the predominant 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 contract 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. The petitioner has 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 - The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made; [5] The case of the State is that since a tax on the sale or purchase of goods includes in terms of sub-clause (d) of Article 366(29A) tax on the transfer of the right to use any goods for any purpose the petitioner is liable to pay value added tax on such transfer of right to use goods. The contention of the petitioner is that it has entered into a service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /VAT Act of the State. [9] In the case before us the contract is for hiring of goods and services. The stand of the State is that ONGC has exclusive use and right to use the goods involved in the contract and therefore there is transfer of the right to use goods and as such tax is leviable under Section 4(3) of the TVAT Act read with Rule 7(2) of the Rules. It is further contended that in terms of Section 4(3) of the Act the person making payment on this account is bound to deduct tax as leviable under law. Section 4 of the TVAT Act reads as follows: 4. Tax on deemed sales - (1) Notwithstanding anything contained elsewhere in this Act, any transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to be a sale of those goods by the person making the transfer and shall liable to be taxed at the rate specified in the Schedule: Provided that in respect of any such transfer, only so much value of the goods involved in the works contract which has actually been paid to the dealer during the period, shall be taken into account for determining the turnover for the period. Explanation :- For the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use any goods or not? [10] A Constitution Bench of the Apex Court in 20th Century Finance Corpn. Ltd. and another Vrs. State of Maharashtra : (2000) 6 SCC 12 dealt with the issue with regard to the power of the State legislature to levy tax under Clause 29A(d) of Article 366 of the Constitution on the transfer of the right to use any goods. This is the leading judgment on the point. The following questions were framed by the Apex Court: The questions therefore, that arise for consideration in these cases are, whether a State can levy sales tax on transfer of right to use goods merely on the basis that the goods put to use are located within its State irrespective of the facts that- (a) the contract of transfer of right to use has been executed outside the State: (b) sale has taken place in the course of an inter-State trade; and (c) sales are in the course of export or import into the territory of India.**** Answering this question the Apex Court held as follows: 27. Article 366(29A)(d) further shows that levy of tax is not on use of goods but on the transfer of the right to use goods. The right to use goods accrues only on account of the transfer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-clause (b) of Article 366 Clause 29A of the Constitution. It held as follows: Prior to the amendment of Article 366, in view of the judgment of this Court in State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. (1958) 9 STC 353: AIR 1958 SC 560 the States could not levy sales tax on sale of goods involved in a works contract because the contract was indivisible. All that has happened in law after the Forty-sixth Amendment and the judgment of this Court in Builders' case (1989) 2 SCC 645 is that it is now open to the States to divide the works contract into two separate contracts by a legal fiction: (i) contract for sale of goods involved in the said works contract, and (ii) for supply of labour and service. This division of contract under the amended law can be made only if the works contract involved a dominant intention to transfer the property in goods and not in contracts where the transfer in property takes place as an incident of contract of service ...What is pertinent to ascertain in this connection is what was the dominant intention of the contract .On facts as we have noticed that the work done by the photographer which as held by this Court in STO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the Constitution. If it was a service then the Central Government alone could levy service tax under Entry-97 of List-I or Entry-92-C of List-I after 2003. The Apex Court further held if the nature of the transaction has characteristics of both sale and service then the moot question would be whether legislative authorities could levy separate taxes together or only one of them. The Apex Court dealt with the following question: The principal question to be decided in these matters is the nature of the transaction by which mobile phone connections are enjoyed. Is it a sale or is it a service or is it both? If it is a sale then the States are legislatively competent to levy sales tax on the transaction under Entry 54 List II of the Seventh Schedule to the Constitution. If it is a service then the Central Government alone can levy service tax under Entry 97 of List I (or Entry 92C of List I after 2003). And if the nature of the transaction partakes of the character of both sale and service, then the moot question would be whether both legislative authorities could levy their separate taxes together or only one of them. [14] In the BSNL case the petitioners before the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isolated and be subjected to sales tax. 43. Gannon Dunkerley survived the 46th Constitutional Amendment in two respects. First with regard to the definition of 'sale' for the purposes of the Constitution in general and for the purposes of Entry 54 of List II in particular except to the extent that the clauses in Art.366(29A) operate. By introducing separate categories of 'deemed sales', the meaning of the word 'goods' was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, goods, delivery etc. would continue to be defined according to known legal connotations. This does not mean that the content of the concepts remain static. The courts must move with the times. But the 46th Amendment does not give a licence, for example, to assume that a transaction is a sale and then to look around for what could be the goods. The word goods has not been altered by the 46th Amendment. That ingredient of a sale continues to have the same definition. The second respect in which Gannon Dunkerley has survived is with reference to the dominant nature test to be applied to a composite transaction not covered by Article 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter of contract and intention. The seller and such purchaser would have to be ad idem as to the subject matter of sale or purchase. The Court would have to arrive at the conclusion as to what the parties had intended when they entered into a particular transaction of sale, as being the subject matter of sale or purchase. In arriving at a conclusion the Court would have to approach the matter from the point of view of a reasonable person of average intelligence. [16] After referring to 20th Century Finance Corpn. Ltd. case the Apex Court went on to hold that the delivery of the goods was also an essential part of the right to transfer of the goods. The relevant observations are as follows: 75. In our opinion, the essence of the right under Article 366 (29A) (d) is that it relates to user of goods. It may be that the actual delivery of the goods is not necessary for effecting the transfer of the right to use the goods but the goods must be available at the time of transfer must be deliverable and delivered at some stage. It is assumed, at the time of execution of any agreement to transfer the right to use, that the goods are available and deliverable. If the goods, or wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have, however, a different problem at hand. The appellant admittedly is a service provider. When it provides for service, it is assessable to a tax known as service tax. Such tax is leviable by reason of a parliamentary statute. In the matter of interpretation of a taxing statute, as also other statutes where the applicability of Article 246 of the Constitution of India, read with the Seventh Schedule thereof is in question, the Court may have to take recourse to various theories including aspect theory as was noticed by this Court in Federation of Hotel Restaurant Association of India, etc. v. Union of India Ors. [(1989) 3 SCC 634]. 29. If the submission of Mr. Hegde is accepted in its entirety, whereas on the one hand, the Central Government would be deprived of obtaining any tax whatsoever under the Finance Act, 1994, it is possible to arrive at a conclusion that no tax at all would be payable as the tax has been held to be an indivisible one. A distinction must be borne in mind between an indivisible contract and a composite contract. If in a contract, an element to provide service is contained, the purport and object for which the Constitution had to be amended and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the country including Agartala. [21] The case of the petitioner is that this is not a contract for hiring of machinery but for hiring of services. According to the petitioner, the soil conditions differ from place to place and soil conditions can be different as the drills go deeper down the hole. Therefore, it is not only the machinery which has to work but the experts in the field of directional drilling have to assess the data collected and decide what is the action to be taken. This assessment is based on the geological conditions and a variety of information which is collected and analysed. According to the petitioner the drill path has to be prepared by a well qualified planner with the objective of reaching the target. The tools which are used for such drilling are highly sophisticated tools which cannot be used by any unqualified person. These tools have to be used by highly qualified persons who have knowledge and expertise in the field. This highly specialized men power then operates the directional drillers and sometimes drillers have to be called from all over the world to carry out the drill. The directional driller monitors the path of the drilling minute to minut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R shall carry out operations hereunder with due diligence and in a safe and workman like manner according to good international is oilfield practice. CONTRACTOR shall maintain strict discipline and good conduct among its employees and its SUB-CONTRACTOR s employees and shall abide by and conform to all rules and regulations promulgated by the CORPORATION governing the operations. Should CORPORATION feel that the conduct of any of CONTRACTOR/SUB-CONTRACTOR s employees is detrimental to CORPORATION s interest, the CORPORATION shall have the unqualified right to request for the removal of such employee either for Incompetence, unreliability , misbehavior, security reasons etc. while on or off the job. The CONTRACTOR shall comply with any such request to remove such personnel at CONTRACTOR s expense unconditionally. The CONTRACTOR will be allowed a maximum of 7(Seven) working days to replace the person by competent qualified person at CONTRACTOR S cost. 13.1 Verification of character and antecedents of Contractual Manpower In all contracts involving deployment of Contractor s manpower within ONGC s premises like plants, offices, installations, rigs, stock yards etc., the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) MWD + Gamma Ray Tool D 1320 163.15 1483.15 (b) SDMM E 1280 158.21 1438.21 (c) Jar F 180 22.25 202.25 (iii) Day Rate Charges: Day Rate Service Tax @ 12.36% Day Rate with Service Tax (a) For 02 Nos. Directional Driller per day i.e. 01 Directional Driller per shift. G1 10 1.24 11.24 (b) For 02 Nos. MWD Engineers per day i.e. 01 MWD Engineer per shift. G2 10 1.24 11.24 (iv) Mob De-Mob Charges (Lum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. MWD tool 25000 NIL 25000 2. Gamma ray tool 10000 NIL 10000 3. NMDC 6 / 6 OD 18000 NIL 18000 4. Float Sub 6 900 NIL 900 5. SDMM 6 /6 58000 NIL 58000 6. String Stabilizer in the range of 8000 NIL 8000 7 to 12. 8.3 / 8 7. Drilling Jar 6 / 6 38000 NIL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question was a service agreement. Conclusion: [24] 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 petitioner has paid service tax it 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), if there is a conflict between the Central law and the State Act then the Central law must prevail. The petitioner cannot be burdened with two different taxes for the same transaction. [25] After carefully going through the contract we are of ..... 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