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M/s. K.P. Mozika vs Oil and Natural Gas Corporation Ltd. & Ors.

Not available · 2024 INSC 27Decided 9 Jan 2024
Not available
Justice Abhay S. Oka · Justice Rajesh Bindal

Background

This was a batch of over 40 connected appeals from Assam, where transport contractors had agreed to supply vehicles (trucks, cranes, tankers, trailers and buses) with drivers and crew to Oil and Natural Gas Corporation (ONGC) and Indian Oil Corporation (IOCL) for their operations. Tax authorities and the Gauhati High Court held that these contracts amounted to a "transfer of the right to use goods", a deemed "sale" under Article 366(29A)(d) of the Constitution, making the contractors liable to pay sales tax/VAT under Assam's tax laws. The contractors argued instead that they were merely providing a service (since they retained control of the vehicles, drivers and maintenance) and challenged the tax demand.

Decision Breakdown

The Supreme Court applied the five-test framework laid down in an earlier BSNL judgment (by Justice A.R. Laxmanan) for determining whether a transaction is a "transfer of the right to use goods": all five conditions, including that effective control and possession of the goods must genuinely pass to the user, must be satisfied for it to count as a deemed sale. Examining the actual contract clauses (the contractor supplied drivers/crew, bore all operating costs, insurance, and liability for damage, and retained control over parking, maintenance and deployment of the vehicles), the Court found that control never truly passed to ONGC/IOCL, only a license to use the vehicles for specific tasks was granted, not the "right to use" in the legal sense. Since the "effective control" test failed, none of the contracts qualified as a deemed sale, and the transactions instead fell under "supply of tangible goods" service tax under Section 65(105)(zzzzj) of the Finance Act (once that provision came into force). The Court allowed all the contractors' appeals, holding they were not liable for sales tax/VAT, while a related appeal by the Union of India was disposed of with liberty to pursue service tax recovery separately.

Lesson Learnt

Whether a hiring/contract arrangement is taxed as a "sale" (transfer of right to use goods) or as a "service" depends on who retains actual effective control and possession of the goods: merely making equipment or vehicles available for a client's use, while the owner keeps control over operation, maintenance and staffing, is a service, not a sale.

Official source (sci.gov.in)View Judgment (PDF)

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