Supreme Court relied on the principle that a transaction must satisfy the essential characteristics of a “sale” to be subjected to sales tax.
Case Title: M/s. K.P. Mozika vs Oil and Natural Gas Corporation Ltd. & Ors
Case No: CIVIL APPEAL NO.3548 OF 2017
Decided on: 09.01.2024
Coram: Hon’ble Mr. Justice Abhay S. Oka
Facts of the Case
This group of appeals revolves around whether transporting companies owe taxes on vehicles provided to Oil and Natural Gas Corporation (ONGC) and Indian Oil Corporation (IOCL). The question hinges on whether hiring these vehicles constitutes a “sale” under Indian tax laws. If the agreement involves transferring the right to use the vehicles, it might be considered a sale and subject to tax. However, if it simply involves providing a service (i.e., transportation), the tax implications could differ. This case ultimately clarifies the tax treatment of such arrangements, potentially offering relief to transporters by avoiding double taxation.
In this case, a company agreed to provide crane services with crew to ONGC for its operations. ONGC threatened to deduct taxes on these services, prompting the company to challenge this in court. Both the single judge and the division bench ruled against the company, considering the agreement a transfer of goods usage rights and thereby subject to tax under VAT and Sales Tax Acts. This sets a precedent for similar agreements involving temporary vehicle usage and potential tax implications.
Issues
Whether the transactions reflected from the agreements subject matter of these appeals amount to a sale within the meaning of sub-clause of (d) of Clause 29A of Article 366?
Legal Provision
Clause 29A of Article 366 of Indian Constituition –
“tax on the sale or purchase of goods” includes—
- a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment, or other valuable consideration;
The definition of “sale” under the Sales Tax Act, in subsection (33) of Section 2, incorporates the requirement of transfer of property in goods.
Court Analysis and Decision
Clause 29A(d) of Article 366 expands the definition of a taxable “sale of goods” beyond the traditional requirement of ownership transfer. While the Sale of Goods Act hinges on both possession and property transfer, Clause 29A(d) focuses on the “transfer of the right to use any goods” for consideration, regardless of the purpose or duration. However, granting mere permission to use goods, devoid of a genuine transfer of usage rights, does not fall under this provision. Recognizing this distinction is paramount for determining tax liability in situations involving temporary access to goods for a fee.
The Court with reference to case 20th Century Finance Corporation Ltd. & Anr. v. State of Maharashtra [(2000) 6 SCC 12] held that to attract subclause (d) of Clause 29A of Article 366, the goods must be available at the time of transfer, must be deliverable and delivered at some stage. If the goods are not deliverable at all by the service provider to the subscriber, the question of the right to use those goods would not arise.
The contract in present case provides that there is no transfer of the right to use the crane/equipment. The Contractor fully controls the trailers during the contract period, and therefore, again, this is a case of a license granted to ONGC to use the trailer, and the right to use the trailer is not transferred to ONGC.
The court allowed 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. Civil Appeal no.3580 of 2017 preferred by the Union of India is disposed of given the earlier findings with the liberty to the Union of India to initiate proceedings, if any, for recovery of service tax by law.
“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal falls into the category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.”
Written by- Bhawana Bahety