In a recent landmark decision, the Supreme Court clarified that the hiring of motor vehicles and cranes by ONGC from contractors is deemed a service, exempt from Sales Tax or Value Added Tax (VAT). The ruling emphasised that for a transaction to be considered the sale of goods, the transfer of the right to use must include both possession and control.
The case involved ONGC hiring motor vehicles and cranes from contractors, with the contractors retaining control over the goods. This control included providing crew members, covering expenses for fuel, oil, maintenance, and addressing any loss or damage to equipment. The pivotal question was whether such hiring constituted a transfer of the right to use, attracting Sales Tax or VAT.
The bench, comprising Justice Abhay S. Oka and Justice Rajesh Bindal, asserted that substantial control over the goods must be with the user for it to qualify as a transfer of the right to use. If control remains with the contractor during the hiring period, it is deemed a service, and only service tax can be levied.
In 2006, M/s. K.P. Mozika entered into a contract with ONGC to provide truck-mounted hydraulic cranes for its operations. ONGC threatened to deduct tax at source under the VAT Act, leading to a legal dispute. The High Court initially ruled in favour of tax liability, stating the contract involved the transfer of the right to use goods. The Supreme Court appeal contested this decision.
The Supreme Court referred to Entry 48 of List–II of the Seventh Schedule to the Government of India Act, 1935, emphasising that for a tax on the sale of goods, there must be a sale as defined in the Sale of Goods Act, 1930.
The Two-Judge Supreme Court Bench of Justice Abhay S. Oka and Justice Rajesh Bindal, held that, “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 judgement highlighted the 46th Amendment to the Constitution, specifically Clause 29A, which taxed the transfer of the right to use goods. However, the court concluded that the contracts between ONGC and the contractors did not satisfy the criteria for a transfer of the right to use goods, as outlined in Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors.
The Bench ruled that the contracts were not subject to the Sales Tax Act and VAT Act, as they did not involve the transfer of the right to use the goods.
The appeal was thus allowed, and the High Court order was set aside.
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