LI Network
Published on: January 12, 2024 at 11:00 IST
The Supreme Court clarified that the hiring of motor vehicles or cranes from a contractor should be considered a service rather than a sale of goods, thus not attracting Sales Tax or Value Added Tax (VAT).
The Court emphasized that the transfer of the right to use goods involves not just possession but also control over the goods by the user. If control remains with the contractor during the hire period, it does not qualify as the sale of goods, and only service tax can be applied.
The case involved the hiring of motor vehicles and cranes by ONGC from contractors, where the contractors retained control over the goods. This control included providing crew members for operations, covering expenses like fuel and maintenance, and being responsible for any loss or damage to the equipment. The central question was whether such hiring constituted a transfer of the right to use goods, attracting Sales Tax or VAT.
The Supreme Court bench, comprising Justice Abhay S. Oka and Justice Rajesh Bindal, emphasized that substantial control must remain with the contractor to categorize the transaction as the transfer of the right to use. If the user does not have control over the goods, the transaction is deemed a service under Section 65(105) (zzzzj) of the Finance Act.
In reviewing the background facts of the case, the court addressed the constitutional provisions related to taxes on the sale of goods and relied on precedent judgments. It concluded that the contracts in question did not satisfy the criteria for the transfer of the right to use goods, as outlined in the Sale of Goods Act and subsequent amendments.
The Court’s decision allows the contractors in question to be exempt from Sales Tax and VAT, as the transactions were deemed to be services rather than the sale of goods. The ruling clarified the distinction based on possession and control, providing a significant legal interpretation for such contractual arrangements.
The Supreme Court’s verdict set aside the earlier High Court order, stating that the contracts for hiring motor vehicles and cranes were not covered by Sales Tax Act and VAT Act.
The Court’s decision underscores the importance of control in determining the nature of transactions involving the hiring of goods from contractors.
