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TMI Blog2010 (5) TMI 759X X X X Extracts X X X X X X X X Extracts X X X X ..... r. A.K. Saraf, senior advocate for the petitioners, Dr. B.P. Todi, senior advocate for the corporation, Mr. D. Saikia, learned standing counsel, Finance Department, Government of Assam, for the Revenue and Mr. B. Sharma, learned Central Government standing counsel, for the Union of India. The pleaded accounts of the parties in the fray are indispensable to appropriately comprehend the contentious arguments based thereon. The petitioners represent to be proprietorship firms carrying on business in various locations of the State and own hydraulic cranes with necessary licence and other testimonials to be legally, possessed thereof. In response to the notice inviting tenders (for short, hereafter referred to as, "the NIT") issued by the corporation for the hire of services of hydraulic cranes for carrying out its operations on stipulations as mentioned therein, the petitioners responded thereto and eventually individual contract agreements were executed between the parties June 22/23, 2009. Meanwhile the Act had been enforced on and from May 1, 2005 mandating imposition and collection of tax on sales and purchases of goods in the State of Assam and matters connected therewith and inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its counter affirmed by the Joint Commissioner of Taxes, Assam, however, has insisted that a bare perusal of the contract agreements demonstrates the transactions involving transfer of right to use the cranes in favour of the corporation, superficial trappings to the contrary notwithstanding and that therefore the petitioners are liable to pay tax under the Act. While contending that the contract agreements proclaim a clear dominion of the corporation over the cranes during the subsistence of the contract as an unmistakable index of transfer of right to use thereof by the contractors, the answering respondent has dismissed the recital to the contrary as inconsequential being a delusive representation to avoid the tax liability. It has been maintained that the petitioners' claim of payment of service tax in the transactions per se would not be extinctive of the other discernible attributes of sale and that in the facts and circumstances of the case, having regard to the scope and ambit of the Act, the proposed deduction of tax thereunder is valid in law. The Union of India in its affidavit while reinforcing the petitioners' plea of providing service through their cranes un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned senior counsel, such a segregation in the case of a composite contract comprised of sale and service constituents is permissible only in cases envisaged in clauses (b) and (f) of article 366(29A) of the Constitution of India. He has thus pleaded that for the application of clause (d) thereunder the transfer of right to use goods should be in absolute terms encompassing the contract as a whole. In case such a transfer of right to use of goods is a unit of a composite contract, clause (d) cannot be invoked and the same cannot be set apart to enable the State to levy tax thereon. As in the case in hand, the contract agreements envisage payment of service tax by the contractors, the parties consciously construed the transactions to be one of hiring of the service of the cranes and, therefore, on that count as well sales tax on the cranes is not payable, he urged. Dr. Saraf further argued that the contracts involved in the present proceedings are distinguishably different from those scrutinised by this court in W.A. No. 138 of 2007 (Dipak Nath v. Oil and Natural Gas Corporation Ltd. [2010] 31 VST 337) and, therefore, the analogy of that decision being inapplicable to the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . According to the learned standing counsel, the clauses of the contracts demonstrate with particularity the exclusive dominion of the corporation over the cranes and the employees of the contractors during the subsistence thereof which testify the transfer of right to use of the machines to it. As the hire rent under the contracts is payable for the cranes irrespective of the use thereof, the concept of hiring of the same for the services only is misconceived, he urged. According to Mr. Saikia, the right reserved to the corporation to get the unexecuted work completed by other agencies evinces its prerogative and control over the transactions. While emphasising that the contractors under the contract are not entitled to withdraw the cranes once placed with the corporation, Mr. Saikia has insisted that the contracts as involved in W.A. No. 138 of 2007 (Dipak Nath v. Oil and Natural Gas Corporation Ltd. [2010] 31 VST 337) are exactly similar to those in hand and, therefore, the decision rendered therein is final and binding. Further the stand of the corporation in this regard is also decisive, he urged. According to him, viewed in the context of the definition of "taxable service" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontemplated by the Act and the above constitutional provision. The litmus test to unravel the conundrum is an indispensable analysis of the contract agreements engrafting the intention of the parties thereto. Decisive significantly herein is the Revenue's concurrence on the indivisibility of the contract agreements if ascertained to be an amalgam of sale and service segments. For the sake of brevity and certitude the contract agreement in W.P. (C) No. 5453 of 2009 would be referred to. As all the contract agreements share a common paradigm, the reference to any one would adequately depict the quintessence thereof, sans any prejudice to the parties. Noticeably, the contracts are post May 16, 2008 with effect from which clause (zzzzj) was inserted in section 65(105) by the Finance Act, 2008 bringing within the purview of taxable service, the service provided or to be provided to any person by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use without transferring the right of possession and effective control of such machinery equipment and appliances. The opening recital of the contract agreements discloses that the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Operational charges 'Operational charges' are the charges mentioned below: Operation time charges per working day-Per day hire charges as per schedule of rates. Operational time charges per working hour = Operational time charges per working day/10 hours. (pro rata hourly rate). 1.34 Commencement of contract period 'Commencement of contract period' means the date on which the crane, fully equipped with crew and in perfect working condition has been placed at the disposal of ONGC at Sivasagar or any other appointed place in the Eastern Region of ONGC (refer clause 6 of this contract agreement) 3.0 Duration of the contract This contract shall remain valid for a period of three years from the actual date of mobilisation (the date when the crane is deployed for ONGC duty) as per the rates given at annexure A. The date of commencement of contract for each crane for reckoning its period of contract shall be date on which the said crane under the contract is deployed for duty of the ONGC. 6.4 Assignment The contractor shall not, save with the previous consent in writing of the ONGC, sublet/sub-contract, transfer or assign the contract or any part thereof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Bank, Sivasagar Branch, Hospital Road, Sivasagar, valid up to November 30, 2012. The security deposit/performance guarantee is to secure satisfactory performance and execution/completion of all jobs by the contractor against the said contract. The performance bond/bank guarantee shall be kept valid for 60 days beyond the expiry period of the contract. In absence of above validity period of performance bond (back guarantee), payment of all dues to the contract up to the limit of SD shall be returned as part of the SD, which shall be refunded after receipt of requisite bank guarantee. The security deposit is refundable only after successful completion of work/contract, without any interest thereon and after the adjustment of any dues of the ONGC, if so arises during the execution/ currency of the contract. In the event contractor fails to honour any of the commitments entered into under this agreement or in the event of termination of the contract under provisions of integrity pact, and/or in respect of any amount due from the contractor to the ONGC, the ONGC shall have unconditional option under the guarantee to invoke the above bank guarantee and claim the amount from the ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire period of their engagement in connection with this contract. ONGC will have no liability on this account. 16.1 Indemnity by contractor Unless otherwise specified elsewhere in this contract, contractor shall indemnify and keep indemnified ONGC, its contractors (other than the contractor) and/or sub-contractors and its/their employees from all actions, proceedings suits, claims, demands, liabilities, damages, losses, costs, charges, expenses (including without limitation, wreck or debris, removal costs, where wreck or debris removal is ordered by a competent authority) judgments and fines arising out of or in the course of or caused by the execution of work under the contract or other obligations hereunder directly or indirectly associated herewith and/or arising from: 17.4 Termination for unsatisfactory performance If the ONGC considers that the performance of the contractor is unsatisfactory or, not up to the expected standard, the ONGC shall notify the contractor in writing and specify in detail the cause of such dissatisfaction. The ONGC shall have the option to terminate this agreement by giving 30 days notice in writing to the contractor, if, contractor fails to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor shall have to provide necessary numbers of slings, hooks, dunnage material, other expedient for loading/unloading, etc., to ensure prompt and efficient operations in slushy and difficult oil field conditions by the crane, as per the requirement of the operation to attain an optimum use of crane. He shall also maintain at all time the crane in perfect working condition for the rated capacity and designed efficiency during the period of contract with following minimum nos. of slings/hooks/dunnage materials. 3.. Placement of crane 3.1. Contractor shall mobilize the offered crane(s) within 150 days of issue of fax order/NOA/LOI. 3.2 The crane shall be brought at the place to be nominated by ONGC at the commencement date and taken back on the conclusion/ termination of the contract or rejection/non-acceptance of the crane(s) entirely at contractor(s) cost and ONGC shall bear no cost and will not be held responsible for such transportation. 4.. Inspection 4.1 The crane offered by the contactor shall be inspected/documents verified for sale operations and meeting requirements as specified in this tender. The contractor shall be obliged to provide to the ONGC's represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch cases. 6.. Operational norms/conditions: 6.1 The employees of the contractor and/or its sub-contractor if any, although working for and at the discretion of the ONGC shall be and remain the employees of the contractor and such working arrangement shall in no way create or to be constructed to create an employer-employee relationship between such employees and ONGC. The contractor shall also undertake to replace any of their employee(s) who misbehave(s) with the employee(s) of ONGC or whose continuance may hamper the smooth operation under the contract. 6.2 The contractor shall do all acts and deeds as and when required and necessary for rendering services against this contract whether expressly provided in the contract or not and whether directly related or incidental thereto. No extra charges shall be payable to the contractor for attending to all jobs and liaison work. 6.3 The crane is being hired for work in oil field conditions, which in addition to normal operations of oil fields include hazardous situation like blow out in wells. In such hazardous situation the crane shall have to work as per the direction of ONGC authorized representative and carry out the desi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative of ONGC). Similarly to and fro transport arrangement shall be made by the contractor for all his staff/representative at his own cost and when required for the continuity of the operations or for staff replacement needed in any particular field/site or for any other purpose. The contractor shall maintain adequate transport for such immediate assistance. 6.15 The contractor shall have proper and adequate arrangement for fuel, lubricants and other consumables, etc., all the time to complete the job within the scheduled time. Without prejudice to any other rights that ONGC may have under the contract, the contractor shall be liable to pay the liquidated damages to ONGC in case the contractor fails to complete the work in scheduled time and the assigned manner. The scheduled time shall be computed based on standard norm of operations settled mutually. In case of any dispute the decision of the competent authority of ONGC shall, however, be final and binding on contractor. 6.16 All the works related to operation of cranes, repairs/maintenance, POL shall be arranged by the contractor at his cost. In the event of failure of contractor to place the crane(s) at the disposal of ONGC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... occurrence of the accident, within the prescribed period aforesaid shall make the contractor liable for payment of liquidated damages as per clause No. 16 of the contract agreement. However, if the contractor provides a substitute crane of the same specifications, as the original, within a reasonable period of seven days, from the date of occurrence of the accident, ONGC may at its option consider the case to waive the imposition of liquidated damages as per clause 16 of the contract agreement. 7.9 The ONGC shall not be responsible for any claim/compensation that arises due to damages/injury/pilferage to the contractor's cranes/property/operator/driver/rigger-slinger/khalasi/labourers and staff under any circumstances while the crane were/are/is engaged for the ONGC duty by him. The contractor shall ensure that his crew should refrain from smoking or carry any inflammable substance at the installations/rig-site/stores yards, etc., while on duty with ONGC. The contractor shall also abide by and comply with all rules regarding safety and security measures while on duty with ONGC, as per the Mines Act/any other Act or statutory order or executive instructions from the competent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses) although not specifically mentioned in terms and conditions but considered necessary or expedient to the performance of the services in a satisfactory manner and up to desired standard. 9.5 Contractor shall pay income-tax, sales tax, custom duties and other taxes, levies, etc., as applicable from time to time directly to the respective authorities. However ONGC shall make deduction from the bills as per the demand of the respective authorities from remittance on behalf of the contractor. 9.7 ONGC shall not be liable to make any payment to the contractor, unless and until the successful bidder gets himself registered under the AGST Act and submits an authenticated copy of the certificate of registration and sales tax clearance certificate to ONGC within 15 days from the date of award of contract. 16.. Liquidated damages 16.1 The failure of the contractor to provide the required service quantitatively/qualitatively, timely and efficiently results into substantial losses to ONGC, which the Contractor is fully aware, ONGC cannot be fully compensated for such losses, the same being very heavy in terms of loss or production and the overheads being incurred by ONGC. However, to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actors are thereby required to provide manned and equipped cranes to be accepted on due inspection thereof by the corporation. The operations essentially have to be carried out at the corporation's site(s) as it would be identified and selected by it. The cranes are required to be placed at the disposal of the corporation on daily rate basis with the normal working hours from seven hours for 10 hours everyday with half hour as lunch break. The contractors are required to provide the cranes for all days in a calendar month accepting four days earmarked as maintenance off days. The corporation however, had reserved to itself the right to engage the cranes also during the maintenance off dates depending upon the exigencies of work. The contract period commences from the date on which the cranes fully equipped with crew and in perfect condition are placed at the disposal of the corporation at Sivasagar or any other appointed place in the eastern region under it. Under the contract agreement, the contractors are to perform all services thereunder with all reasonable skill, diligence and care in accordance with sound industry practice to the satisfaction of the corporation and accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll safety measures to prevent such eventualities are also to be secured by the contractors. The services of the manned cranes, under the contract agreements are to be available for performing the duties as advised by the corporation at the appointed time and place throughout the period thereof and the works would include but not limited to dismantling/erection of deep drilling/rigs/work over rigs besides loading/unloading works of heavy drilling production equipments, etc., as may be assigned from time to time by the authorized representatives of the corporation at the various points/sites/installations/production. The stipulations, however provide that the cranes along with their original documents once approved by the corporation for its services would not be changed during the period of the contract except on being defective and other cranes of similar specifications are offered as replacement. All works relating to the operation of cranes/repair/maintenance, have to be arranged by the contractors at their own cost and in the event of their failure to place the cranes at its disposal for its works at the appointed time and place, the corporation would be at liberty to make alte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide competent and experience project incharge acceptable to the corporation who would receive and carry out directions and instructions from it with regard to the scope of work. The corporation has reserved to it the right to award the whole or part of the work against the contract to any number of contractors at its sole discretion and the contractors would thus have no right to claim any particular share in total work and it would be the discretion of the corporation for any distribution thereof amongst other contractors, even during the currency of the contract and that too without assigning any reason whatsoever. The right to get the work under the contract executed departmentally or through some arrangement in part or in full has also been retained by the corporation. The contractors are not only required to comply with all relevant clauses ensuring, inter alia, all measures necessary to protect their personnel, the work and facilities but also abide by all reasonable safety rules and instructions. They are obliged to bear all tax liabilities, duties, levys, etc., including service tax, customs duty, et al. The corporation has reserved to itself its right to terminate the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty in goods (other than by way of a mortgage, hypothecation, charge or pledge) by one person to another for cash or for deferred payment or other valuable consideration and includes- (iv) a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration." Being confronted with the problem relating to the power of the State to levy tax on the sale of goods, more particularly vis-a-vis composite contracts such as works contracts, hire purchase contracts and catering contracts keeping in view of the decision of the apex court rendered in State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. [1958] 9 STC 353; AIR 1958 SC 560, the law commission to which the issue was referred for scrutiny suggested amongst others an enlarged definition of the expression "sale" to be inserted in article 366 of the Constitution of India so as to include works contracts. The Constitution (Forty-sixth Amendment) Act, 1982 followed incorporating clause (29A) in article 366 to define "tax on the sale or purchase of goods" as hereunder: "(a) a tax on the transfer, otherwise than in pursuance of a contract, of prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, treats the sale of materials separately from the cost of the labour, the sale of materials would be taxable, but in the case of an indivisible works contract, it is not possible to levy sales tax on the transfer of property in the goods involved in the execution of such contract as it has been held that there is no sale of the materials as such and the property in them does not pass as movables. . ." A conjoint reading of the definitions of "lease", "sale" and "tax on the sale or purchase of the goods" therefore irrefutably testifies that in the instant case the transactions evidenced by the contract agreements, if demonstrate transfer of right to use the cranes would be exigible to tax under the Act and not otherwise. In Bharat Sanchar Nigam Ltd. [2006] 3 VST 95; [2006] 145 STC 91; [2006] 3 SCC 1, the apex court dwelt upon the scope and purport of article 366(29A) to decipher the precise connotation of the constituent clauses thereof. The tussle for eligibility to levy the impost on sale or service as the case may be between the States and the Union related to transactions involving mobile phone services. Tracing the evolution of article 366(29A) of the Constitution of India, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht is sought to be transferred. In his Lordship's concurring judgment, Dr. Ar. Lakshmanan J-(as he then was) spelt out the essential attributes of a transaction to constitute transfer of right to use goods in paragraph 97 of Bharat Sanchar Nigam Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 3 SCC 1 (at page 133 of 3 VST): "97. To constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes: (a) there must be goods available for delivery; (b) there must be a consensus ad idem as to the identity of the goods; (c) the transferee should have a legal right to use the goodsconsequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee; (d) 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; (e) having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1994 was also taken note of to decide against any interpretation facilitating mutual entrenchment of taxing entries to render the same transaction taxable both for services, as well as for goods. Their Lordships thus concluded that in case of a composite contract of both services and sale of goods, having regard to the backdrop of article 366(29A), the same ought to be construed as a contract of service assessable to tax under the Finance Act, 1994. Relying on paragraph 97 of Bharat Sanchar Nigam Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 3 SCC 1 it was held, inter alia, with reference to the clauses in the contract involved that the permission and licences for operating the Maruti omni cabs having remained in the control and possession of the respondent, no transfer of right to use the same had occurred. The decisions cited on behalf of the Revenue having been appropriately noted and discussed in Bharat Sanchar Nigam Ltd. [2006] 3 VST 95 (SC); [2006] 145 STC 91 (SC); [2006] 3 SCC 1 separate dilation thereof is considered inessential. The various clauses referred to hereinabove if considered in conjunction along with the unqualified recital in the scope of work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not contemplate transfer of right to use of the cranes by the contractors in favour of the corporation divesting themselves of their authority and control over the same. The determination made by a Division Bench of this court in Writ Appeal No. 138 of 2007 (Dipak Nath v. Oil and Natural Gas Corporation Ltd. [2010] 31 VST 337) and a batch of other writ appeals and writ petitions accompanying the same in view of the apparent distinguishable features in the contract agreements involved, in the present adjudication does not wrest the issue in favour of the Revenue. Not only the contract agreements scrutinized in the aforementioned appeals, though otherwise substantially identical with those in hand did not inscribe the striking and unequivocal recital that the services of the manned cranes to be made available for performing the duties of the corporation would not be by way of lease or transfer of rights for use thereof by the contractors to it (corporation), the parties thereto, in clear terms contemplated realization and payment of service tax at the rate of 10.3 per cent thereon under the Finance Act, 1994. Moreover, the plea of indivisibility of a composite contract of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the service charges in calculating the rate per crane when construed with the opening recital mentioned hereinabove that the transaction would not be one of lease or sale is a veritable index of their outright intention to sequester it from a sale or lease within the meaning of the Act or article 366(29A) of the Constitution of India. In the face of the overwhelming clauses of the contract agreements which predominantly project the transactions for rendition of services of manned cranes by the petitioners, the challenge laid to the competence of the Revenue to realize tax under the Act in connection therewith, appears to be formidable. To reiterate the Revenue has admitted the transactions to be otherwise indivisible. The contract agreements, however do not evidence even a little of the intention of the parties to mutilate the integrity of the transactions engrafted therein into two independent undertakings for transfer of the right to use the cranes and services, quantifying separate values therefor. The essence of the contract agreements is not the cranes, but the covenants to employ the same. As has been envisioned in paragraph 97 of Bharat Sanchar Nigam Ltd. [2006] 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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