Hiring of Motor Vehicle or Cranes not Sale of Goods when Control is Retained by Contractor, VAT not Leviable: SC [Read Judgement]

The Supreme Court of India in a significant ruling observed that the hiring of motor vehicle or cranes is not 'Sale of Goods' when control over the equipment is retained by the contractor and hence VAT is not leviable.

The appeals concern the liability to pay tax under the Assam General Sales Tax Act, 1993 (for short, 'the Sales Tax Act') and the Assam Value Added Tax Act, 2003 ('the VAT Act'), respectively. In some cases, in this group of appeals, the assessee’s have, under a contract, agreed to provide different categories of motor vehicles, such as trucks, trailers, cranes etc to the Oil and Natural Gas Corporation Limited ('ONGC'). There are other cases where Indian Oil Corporation Limited ('IOCL') has entered into agreements with transporters to provide tank trucks to deliver its petroleum products.

The appellant had to approach the High Court on the threat given by ONGC to deduct tax at source under the VAT Act in respect of the services provided by the appellant. Similar petitions were filed before the learned Single Judge of the Gauhati High Court. The Single Judge dismissed the petitions by holding that the contract was for the transfer of the right to use the goods and, therefore, there is a liability under the VAT Act and the Sales Tax Act.

The counsel for the appellant pointed out that the question will be whether the transactions subject matter of these appeals constitute deemed sales within the meaning of Section 2(43)(iv) of the VAT Act with effect from 1st May 2005. He submitted that if the said provisions of the VAT Act are not applicable, the transactions will be subject to service tax under Section 65(105)(zzzzj) of the Finance Act, 1994.

It was also pointed out that the effective control over the vehicles remains with the transporter and is never transferred to the appellants. Relying upon the decision of Allahabad High Court in the case of Ahuja Goods Agency & Anr. v. State of Uttar Pradesh & Ors, he submitted that there is a consistent judicial opinion that hiring vehicles does not amount to a transfer of effective control and possession.

The counsel for the state contended that it is irrelevant that the cranes, trucks, etc., come back to the contractor after the contract period. He submitted that the concept of 'deemed sale' under subclause (d) of Clause 29A of Article 366 of the Constitution of India comes into operation even if there is no legal transfer of ownership of the vehicles followed by its delivery and pointed out that deemed sale is not a sale of the goods, but it is of the right to use the goods.

 A Two-Judge Bench comprising Justices Abhay S Oka and Justice Rajesh Bindal observed that “Accordingly, we allow all the appeals of the assessees by holding that the contracts are not covered by the relevant provisions of the Sales Tax Act and of the VAT Act, as the contracts do not provide for the transfer of the right to use the goods made available to the person who is allowed to use the same.

“Essentially, the transfer of the right to use will involve not only possession, which may be granted at some stage (after execution of the contract), but also the control of the goods by the user. When the substantial control remains with the contractor and is not handed over to the user, there is no transfer of the right to use the vehicles, cranes, tankers, etc. Whenever there is no such control on the goods vested in the person to whom the supply is made, the transaction will be of rendering service within the meaning of Section 65(105) (zzzzj) of the Finance Act after the said provision came into force” the Court noted

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