ONGC Exempted from Sales Tax or VAT on Motor Vehicle/Crane Rentals When Contractor Retains Control: Supreme Court
Case Title: M/s. K.P. Mozika v. Oil and Natural Gas Corporation Ltd. & Ors.
Case No.: Civil Appeal No. 3548 of 2017
Decided on: 9th January, 2024
CORAM: THE HON’BLE MR. JUSTICE ABHAY S. OKA AND HON’BLE MR. JUSTICE RAJESH BINDAL
Facts of the Case
In 2006, M/s. K.P. Mozika engaged in a contractual agreement with ONGC to supply truck-mounted hydraulic cranes for its operations. A dispute arose when ONGC threatened to deduct tax at source under the VAT Act. The case centered on ONGC’s practice of hiring motor vehicles and cranes from contractors, where the contractors retained 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 critical question at hand was whether such hiring constituted a transfer of the right to use, thereby attracting Sales Tax or VAT.
Initially, the High Court ruled in favor of tax liability, asserting that the contract involved the transfer of the right to use goods. The subsequent appeal to the Supreme Court challenged this decision.
Issue
The key issue revolves around whether the engagement of these motor vehicles/cranes constitutes a transfer of the right to use goods. If such a transfer occurs, it would qualify as a sale under Clause 29A(d) of Article 366 of the Constitution of India. To put it concisely, if the transactions fall outside the definition of ‘Sale’ in Clause 29A(d), they may not be subject to taxation under the Sales Tax Act or the VAT Act. Consequently, additional considerations arise, including whether the transactions qualify as services, potentially triggering liability for service tax.
Legal Provision
Clause (d) of Article 366(29A) of the Constitution of India covers supply of goods by a person to another person for some consideration which involves transfer or right to use the goods.
Court’s analysis and decision
The Supreme Court has clarified that the hiring of motor vehicles and cranes by ONGC from contractors is deemed a service and is exempt from Sales Tax or Value Added Tax (VAT). The ruling underscores the requirement that for a transaction to be considered the sale of goods, the transfer of the right to use must encompass both possession and control.
The bench, consisting of Justice Abhay S. Oka and Justice Rajesh Bindal, emphasized that substantial control over the goods must lie 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 imposed.
Referring to Entry 48 of List–II of the Seventh Schedule to the Government of India Act, 1935, the Supreme Court stressed 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, led by 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 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 judgment 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 meet 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. Consequently, the appeal was allowed, and the High Court order was set aside.
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Written by- Afshan Ahmad