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Synopsis

The Supreme Court has said that there is a distinction between transferring the right to use and merely a license to use goods, while allowing appeals against imposition of sales tax on contract for use of trucks, cranes, tankers, buses etc by public sector ONGC.

"In every case where the owner of the goods permits another person to use goods, the transaction need not be of the transfer of the right to use the goods. It can be simply a license to use the goods which may not amount to the transfer of the right to use," a bench of Justices Abhay S Oka and Sanjay Karol said.

The bench pointed out that the transfer of the right to use any goods can be for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. Only because a person is allowed to use certain goods of the owner, per se, there is no transfer of the right to use any goods. The transaction can be either of transfer of the right to use the goods or granting mere permission to use the goods without transfer of the right to use the goods.

The apex court allowed a batch of civil appeals filed by M/s K P Mozika and several others, questioning the liability to pay tax under the Assam General Sales Tax Act, 1993 and the Assam Value Added Tax Act, 2003, respectively for contracts with ONGC to provide different categories of motor vehicles, such as trucks, trailers, tankers, buses, scrapping winch chassis, and cranes.

"The entire controversy revolves around the question of whether the transactions reflected from the agreements subject matter of these appeals amount to a sale within the meaning of sub¬clause (d) of Clause 29A of Article 366 of the Constitution of India and, consequently, whether it is a “sale” within the meaning of clause (iv) of sub¬section (43) of Section 2 of the VAT Act," the court said.

The definition of “sale” under the Sales Tax Act, in sub-section (33) of Section 2, incorporates the requirement of transfer of property in goods, the court added. 

The bench pointed out that Clause 29A of Article 366 was inserted on February 2, 1983, thereby introducing the concept of “deemed sale”.  

"We are concerned with sub¬clause (d) of Clause 29A. The condition for applicability of the sale of goods under the Sale of Goods Act is that apart from the transfer of possession of the goods, there must be a transfer of the property in goods to the buyer. However, sub¬clause (d) of Clause 29A refers not to the transfer of property in the goods to the buyer but to the transfer of the right to use any goods for any purpose for consideration as mentioned in sub¬clause," the bench said.

The court referred to the concurring view of Justice A R Lakshmanan in the case of 'Bharat Sanchar Nigam Limited Vs Union of India' (2006). 

The top court had then held that to constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes: there must be goods available for delivery; there must be a consensus ad idem as to the identity of the goods; the transferee should have a legal right to use the goods—consequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee; for the period during which the transferee has such legal right, it has to be the exclusion to the transferor—this is the necessary concomitant of the plain language of the statute viz a “transfer of the right to use” and not merely a licence to use the goods; having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.

To decide the controversy involved in this group of appeals, the bench went through contracts between the parties to hold that the finding of the high court that there was a transfer of the right to use the vehicles was not correct.

It was apparent that the contractor has an option of replacing vehicles, only the contractor is liable to take care of the legal consequences of using vehicles, their maintenance and to pay for fuel, oil, etc, the court noted.

"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, 2008 after the said provision came into force," the bench said. 

The court, therefore, allowed the appeals by the assessees and granted liberty to the Union government to initiate proceedings for recovery of service tax if any.

Case Title: M/s K P Mozika Vs Oil and Natural Gas Corporation Ltd & Ors