Supreme Court Ruling Exempts Crane Rentals from VAT: Control Over Equipment Key Factor
Supreme Court Ruling Exempts Crane Rentals from VAT: Control Over Equipment Key Factor
The Supreme Court has ruled that the hiring of motor vehicles/cranes constitutes a service, not a sale of goods, for tax purposes. This interpretation hinges on the transfer of not just possession, but also control, of the goods to the user. Therefore, if the contractor retains control during the hire period, only service tax can be levied.
The dispute arose from ONGC's engagement of contractors for motor vehicles/cranes, where the contractors retained control. This manifested in their provision of crew, fuel, maintenance, and liability for damage to equipment, staff, and even ONGC property. The legal question was whether this constituted a "transfer of right to use" under Clause 29A(d) of Article 366 of the Constitution, thereby triggering Sales Tax or VAT.
Justices Abhay S. Oka and Rajesh Bindal clarified that transferring the right to use equipment involves not just granting possession, but also control, to the user. This control extends beyond mere physical access. If the contractor retains substantial control by providing crew, fuel, maintenance, and bearing responsibility for damage, then the transaction is classified as a service under Section 65(105) (zzzzj) of the Finance Act, not a sale of goods.
Back in 2006, K.P. Mozika (the Appellant) signed a contract with ONGC (the Respondent) to provide them with truck-mounted hydraulic cranes, including crew, for their operations.
Apprehensive of tax implications, the Appellant petitioned the Guwahati High Court against ONGC's proposed deduction of tax at source under the VAT Act for the services rendered. Both the single judge and the division bench, on November 25, 2009, dismissed the petition, concluding that the contract encompassed a transfer of the right to use the goods, thereby attracting liability under the VAT Act and the Sales Tax Act.
The Appellant escalated the case to the Supreme Court, challenging the High Court's interpretation of the tax implications. They presented two key arguments: first, that the crane service involved no transfer of ownership, rendering sales tax irrelevant; and second, that the contract fell outside the category of "deemed sales" defined in the VAT Act.
Drawing upon Entry 48 of the Seventh Schedule to the Government of India Act, 1935 and the Supreme Court's precedent in Gannon Dunkerley & Co., the Bench established that the term "sale of goods" for tax purposes carries the same meaning as stipulated by the Sale of Goods Act, 1930. Consequently, state legislatures' power to levy taxes on the sale of goods is contingent upon the transaction falling within the definition of a sale as delineated by the aforementioned Act.
The Bench opined that an essential ingredient of a sale of goods is the transfer of legal ownership in the goods, from the seller to the buyer. This entails both the physical delivery of the goods and the legal transfer of property rights.
The 46th Amendment to the Constitution of India, implemented in February 1983, introduced Clause 29A to Article 366. This clause expanded the scope of taxable transactions, encompassing not only the traditional "sale or purchase of goods" but also "a tax on the transfer of the right to use any goods for any purpose" in exchange for valuable consideration, irrespective of the duration of such use.
Superseding the Sales Tax Act, the Value Added Tax (VAT) Act took effect on April 28, 2005. Aligning with Clause 29A of the Constitution, the VAT Act defines "sale" as the temporary transfer of any goods' usage rights for valuable consideration (Section 2(43)).
Supreme Court in its 2006 ruling in a similar case had ruled that the transfer of the right to use goods needs five things: goods ready for delivery, both parties on the same page about them, the transferee gets the legal right to use (including permits!), that right exclusive during the agreed period, and no double-dipping on transfers during that time. Got it? These five points are the gatekeepers, separating real usage transfers from service agreements, and keeping tax laws clear and fair.
The Bench emphasised that the contract between the parties constituted a service for providing cranes to ONGC, as the transferee (ONGC) was not exposed to any legal repercussions for utilising the cranes supplied by the contractor. Furthermore, the Court noted that the transaction lacked the key attributes established in Bharat Sanchar Nigam Limited & Anr. v. Union of India & Ors., thus negating the possibility of it being categorised as a transfer of the right to use goods for tax purposes.
The Court observed that despite ONGC dictating the workload of the cranes, ultimate control remained with the contractor. This manifested in the contractor providing crew, bearing fuel and maintenance costs, and assuming responsibility for damage to equipment, staff, and property. Consequently, the Court concluded that the contract did not constitute a transfer of the right to use the cranes for tax purposes. The High Court's finding, lacking fulfilment of the five crucial "transfer of right to use" tests, was deemed inaccurate.
The Bench concluded that the contracts for crane services were not subject to either the Sales Tax Act or the VAT Act, as they did not involve a transfer of the right to use the goods to ONGC. Consequently, the appeal was allowed, and the High Court's order was set aside.
