Top Stories No VAT/Sales Tax on hiring of Vehicles or Cranes when Control remains with Contractor: Supreme Court clarifies it as ‘Service’ not ‘Sales of Goods’ [Read Judgment] The Supreme Court ruled that hiring vehicles or cranes without transferring control is a service, not a sale. Exempting it from VAT/Sales Tax but subjecting it to service tax By Kavi Priya – On December 26, 2024 8:25 pm – 3 mins read In a landmark ruling, the Supreme Court clarified that hiring vehicles or cranes without transferring effective control to the user does not constitute a “sale” under VAT or Sales Tax laws, instead such transactions are classified as “services”. K.P. Mozika, the petitioner, a contractor, had entered into agreements with Oil and Natural Gas Corporation Limited ( ONGC ) and Indian Oil Corporation Limited ( IOCL ) for the supply of motor vehicles, including trucks, trailers, tankers, buses, and cranes.

The ONGC threatened to deduct tax under the Assam VAT Act. The petitioner challenged this in the Gauhati High Court. The High Court ruled against the petitioner saying the agreements involved the transfer of the right to use goods and were taxable under VAT. Aggrieved by this decision, the petitioner approached the Supreme Court. The Future of Tax and Finance: Upskill with Us The main question before the Supreme Court was whether these transactions constituted deemed sales within the meaning of Section 2(43)(iv) of the VAT Act and Article 366(29A)(d) of the Indian Constitution or whether they were a supply of services under Section 65(105)(zzzzj) of the Finance Act, 1994. The petitioner’s counsel argued that the agreements were service contracts and that effective control and possession of the vehicles remained with them. They argued that the vehicles were operated and maintained entirely by their staff and that ONGC and IOCL had no exclusive rights or operational control over the vehicles. The petitioner relied on the Supreme Court ruling in the Bharat Sanchar Nigam Limited ( BSNL ) v. Union of India case which established conditions under which a transaction qualifies as a transfer of the right to use goods.

The two-member bench comprising Justice Abhay S. Oka and Justice Rajesh Bindal analyzed the agreements in light of the five conditions laid down in the BSNL case to determine whether a transaction constitutes a deemed sale. One was that the goods must be available for delivery, two there must be mutual agreement on the identity of the goods, three the transferee must have a legal right to use the goods, four the transferee’s right to use must exclude the transferor, and last the owner cannot transfer the same rights to others during the contract period. The Future of Tax and Finance: Upskill with Us The court found that the agreements failed to meet the third and fourth conditions, as the petitioner retained control and possession of the vehicles, and ONGC/ IOCL had no exclusive legal rights over them. The court explained the distinction between granting a license to use goods and transferring the right to use goods. It clarified that for a transaction to constitute a transfer of the right to use goods, both possession and control must be transferred to the transferee. In this case, the vehicles were merely made available for use by ONGC and IOCL, and the operational and maintenance responsibilities, as well as liability remained with the petitioner. So, the contracts were classified as service agreements rather than deemed sales.

The Supreme Court overturned the High Court’s decision. It held that the contracts in question were taxable as services under the Finance Act, 1994, and not as sales under the VAT Act. The Court also granted the Revenue ( UOI ) the liberty to initiate proceedings for the recovery of service tax under the law