TMI Blog2014 (11) TMI 1070X X X X Extracts X X X X X X X X Extracts X X X X ..... e to divide the contract into two separate portions. Every element of the digging directional wells and Mobile Drilling Rig service contains a major element of provisions of services. In such an eventuality it is virtually impossible to divide the contract. It is not possible to work out the value of the right to use goods transferred under the contract. In cases, where the contracts are easily divisible or where the parties have by agreement clearly indicated what is value of the service part and what is value of the transfer of right to use goods part, the contract may be divided. We are in agreement with the Delhi High Court that when the contract cannot be divided with exactitude then the Central Law must prevail. Parties have also been paying service tax and if the State is allowed to tax any portion of the value of the contract then there has to be a proportionate refund of the service tax to that extent. This cannot be done without hearing the Union of India. If there is any dispute between the State or the Union of India then they must resolve it between themselves. The petitioners or the ONGC cannot be made liable to pay both the taxes for the same transaction. The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efer Article 366(29A) of the Constitution of India which reads as follows: 366(29A) tax on the sale or purchase of goods includes- (a) a tax on the transfer, otherwise than in pursuance of a contact, of property in any goods for cash, deferred payment or other valuable consideration; (b) a tax on the transfer of property in goods (whether as goods or in some other form) involed in the execution of a works contract; (c) a tax on the delivery of goods on hire purchase or any system of payment by installments; (d) a tax on the 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; (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itution the Apex Court in Gannon Dunkerley and Co. Vs. State of Rajasthan: 1993(1) SCC 364 dealing with works contracts held that only the value of the goods involved in the execution of works contract could be taxed and this would have to be determined by taking into account the value of the entire works contract after deducting therefrom the charges towards labour, services etc. The Apex Court in the Second Gannon Dunkerley Case concluded that only the value of the goods involved in the execution of a works contract were amenable to the provisions of the Sales Tax/VAT Act of the State. [10] In the cases before us the contracts are for hiring of goods and services. The stand of the State is that ONGC has exclusive use and right to use the goods involved in the contracts and therefore there is transfer of the right to use goods and as such tax is leviable under Section 4(3) of the TVAT Act read with Rule 7(2) of the Rules. It is further contended that in terms of Section 4(3) of the Act the person making payment on this account is bound to deduct tax as leviable under law. Section 4 of the TVAT Act reads as follows: 4. Tax on deemed sales - (1) Notwithstanding anything conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch payment deduct an amount at the rate as notified by the Government from time to time of the payment on account of such transfer of right : provided that till the Government notify the rate, the prevailing rate shall continue : Provided no such deduction shall be made from the bill(s) or invoice(s) of the transferer where the amounts received as penalty for defaults in payment or as damages for any loss or damage caused to the goods by the person to whom such transfer was made, **** The main issue is whether there is a transfer of the right to use any goods or not? [11] A Constitution Bench of the Apex Court in 20th Century Finance Corpn. Ltd. and another Vrs. State of Maharashtra : (2000) 6 SCC 12 dealt with the issue with regard to the power of the State legislature to levy tax under Clause 29A(d) of Article 366 of the Constitution on the transfer of the right to use any goods. This is the leading judgment on the point. The following questions were framed by the Apex Court: The questions therefore, that arise for consideration in these cases are, whether a State can levy sales tax on transfer of right to use goods merely on the basis that the goods put to use are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Court the taxable event on the transfer of right to use goods would be the place where the contract is executed. In the case of M/s. Oil field Instrumentation (India) Ltd., the contract was executed in Maharastra whereas in other cases the contracts were executed within Tripura. [12] The Apex Court in Rainbow Colour Lab Vrs. State of M.P ; (2000) 2 SCC 385 was dealing with the issue as to whether the job rendered by a photographer in taking photographs, developing and printing films would amount to a works contract within the meaning of sub-clause (b) of Article 366 Clause 29A of the Constitution. It held as follows: Prior to the amendment of Article 366, in view of the judgment of this Court in State of Madras v. Gannon Dunkerley Co. (Madras) Ltd. (1958) 9 STC 353: AIR 1958 SC 560 the States could not levy sales tax on sale of goods involved in a works contract because the contract was indivisible. All that has happened in law after the Forty-sixth Amendment and the judgment of this Court in Builders' case (1989) 2 SCC 645 is that it is now open to the States to divide the works contract into two separate contracts by a legal fiction: (i) contract for sale of goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e possession and control of the Ispat Nigam over the property. The Apex Court upheld the judgment of the High Court of Andhra Pradesh. [14] In Bharat Sanchar Nigam Ltd. and another Vs. Union of India and others, (2006) 3 SCC 1 the Apex Court was dealing with the issue as to whether the transaction by which mobile phone connections are enjoyed is a sale or a service or both. The Apex Court held that if it was a sale only the State would be competent to levy sale tax on such a transaction under Entry 54 of List-II of the Seventh Schedule to the Constitution. If it was a service then the Central Government alone could levy service tax under Entry-97 of List-I or Entry-92-C of List-I after 2003. The Apex Court further held if the nature of the transaction has characteristics of both sale and service then the moot question would be whether legislative authorities could levy separate taxes together or only one of them. The Apex Court dealt with the following question: The principal question to be decided in these matters is the nature of the transaction by which mobile phone connections are enjoyed. Is it a sale or is it a service or is it both? If it is a sale then the States ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to bring transactions where one or more of the essential ingredients of a sale as defined in the Sale of Goods Act 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax. To this extent only is the principle enunciated in Gannon Dunkerly limited. The amendment especially allows specific composite contracts viz. works contracts (Sub-clause (b)), hire purchase contracts (Sub-clause (c)), catering contracts (Sub-clause (e)) by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax. 43. Gannon Dunkerley survived the 46th Constitutional Amendment in two respects. First with regard to the definition of 'sale' for the purposes of the Constitution in general and for the purposes of Entry 54 of List II in particular except to the extent that the clauses in Art.366(29A) operate. By introducing separate categories of 'deemed sales', the meaning of the word 'goods' was not altered. Thus the definitions of the composite elements of a sale such as intention of the parties, goods, delivery etc. would continue to be defined according to known legal connotations. This does not m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is no question of the dominant nature test applying. Therefore when in 2005, C.K. Jidheesh vs. Union of India (2005) 13 SCC 37 held that the aforesaid observations in Associated Cement (2001) 4 SCC 593 were merely obiter and that Rainbow Colour Lab (2000) 2 SCC 385 was still good law, it was not correct. It is necessary to note that Associated Cement did not say that in all cases of composite transactions the 46th Amendment would apply. 50. What are the goods in a sales transaction, therefore, remains primarily a matter of contract and intention. The seller and such purchaser would have to be ad idem as to the subject matter of sale or purchase. The Court would have to arrive at the conclusion as to what the parties had intended when they entered into a particular transaction of sale, as being the subject matter of sale or purchase. In arriving at a conclusion the Court would have to approach the matter from the point of view of a reasonable person of average intelligence. As far as the present cases are concerned there can be no manner of doubt that both mud logging machinery and passenger cabs would be goods and there is no dispute on this count. [17] After refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for consideration in any of the aforementioned decisions is the concept of works contract involving both service as also supply of goods constituting a sale. Both, in Tata Consultancy (2005) 1 SCC 308 as also in Associated Cement Company (2001)4 SCC 593, what was in issue was the value of the goods and only for the said purpose, this Court went by the definition thereof both under the Customs Act as also the Sales Tax Act to hold that the same must have the attributes of its utility, capability of being bought and sold and capability of being transmitted, transferred, delivered, stored and possessed. As a software was found to be having the said attributes, they were held to be goods. 28. We have, however, a different problem at hand. The appellant admittedly is a service provider. When it provides for service, it is assessable to a tax known as service tax. Such tax is leviable by reason of a parliamentary statute. In the matter of interpretation of a taxing statute, as also other statutes where the applicability of Article 246 of the Constitution of India, read with the Seventh Schedule thereof is in question, the Court may have to take recourse to various theories including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mine the value of that part of the contract which amounted to services and that portion of the contract which amounted to a deemed sale. This aspect has been also explained in Imagic Creative(P) Ltd. case. The Apex Court has clearly taken a view that the service part of the contract cannot be taxed by the State. This view is in line with the view taken by the Apex Court in the Second Gannon Dunkerley Case. [21] The Delhi High Court in Commissioner, VAT, Trade and Taxes Department vrs. International Travel House Ltd. (Sale Tax Appeal No. 10 of 2009 decided on 8th September, 2009) reported in VAT and Service Tax Cases 77 STC 182 was dealing with a case wherein the International Travel House had entered into a contract with M/s. New Delhi Power Limited (NDPL) for hiring of Maruiti Omni Cabs by the former to the latter. The conditions laid down provided that all the chauffeurs should wear uniforms and should know both Hindi and English. They should all have mobiles. The cars should be kept clean and the rates would be inclusive of fuel, maintenance and driving charges etc. There were many other conditions. The Division Bench of the Delhi High Court held that such a contract was in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ially split up so as to enable the sale element to be taxed, further, the States cannot treat the contract as only a contract of sale of goods and tax the whole value of the transaction as a sale of goods. Since the parties have not intended the contract to be mutilated/severable inasmuch as no different values are specified in the subject contract towards goods value separately and the value of services separately, it is not permissible by the DVAT Act to impose sales tax on the whole transaction value because that would amount to the State to entrench upon the Union List and tax services by including the cost of such services in the value of the goods. Thus, the contract in question being a composite contract is to be treated as a contract for services and no sales tax can be imposed on the contracts in question.***** The Delhi High Court thereafter went on to hold that there was no transfer of right to use goods because the control of the cabs remained with the owner. [22] Both sides have made reference to a number of decisions of the Gauhati High Court. In Dipak Nath Vrs. Oil and Natural Gas Corporation Ltd. and Ors.: (2010) 2 GLR 496 the petitioner had entered into a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question was whether such a transaction amounts to transfer of right to use any goods. The Division Bench held as follows: 47. Of all the different kinds of composite transactions, the drafters of the Forty-sixth Amendment chose three specific situations, a works contract , a hire-purchase contract and a catering contract to bring them within the fiction of a deemed sale . Of these three, the first and third, namely, works contract and catering contract involve a kind of service and sale at the same time. Apart from these two cases, covered by sub-clauses (b) and (f) of clause (29A) of article 366, where splitting of the service and supply has been constitutionally permitted, there is no other service, which has been permitted to be so split. If there is an instrument of contract, which may be composite, in form, in any case other than the exceptions, which article 366(29A) makes, the State would have no power to separate the agreement to sell from the agreement to render service, and thereby impose tax on the component of sale unless the transaction, in truth, represents two distinct and separate contracts and is discernible as such. 48. In other words, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce and transfer of right to use goods present in a contract and the contract is not divisible then if service tax has been paid to the Central Government, the State cannot be levy sales tax. Having discussed the law we now proceed to discuss the facts of individual cases: [28] The facts of two cases being identical are being taken up together: As pointed out above the contract between the parties is for providing directional drilling services. The opening portion of the contract provides that the contract has been entered into for hiring of machinery of MWD, SDMM, Drilling Jars and Bits along with services of directional drillers at various places in the country including Agartala. [29] The case of the petitioners is that this is not a contract for hiring of machinery but for hiring of services. According to the petitioners, the soil conditions differ from place to place and soil conditions can be different as the drills go deeper down the hole. Therefore, it is not only the machinery which has to work but the experts in the field of directional drilling have to assess the data collected and decide what is the action to be taken. This assessment is based on the geologic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y time to inspect/test/examine/verify any equipment machinery, instruments, tools materials, personnel, procedures and reports etc. directly or indirectly pertaining to the execution of the work. However, this shall not construe to imply an acceptance by the inspector. Hence, the overall responsibility of quality of work shall rest solely with the CONTRACTOR. Each and every document emerging from site in support of any claim by the contractor has to have the countersignature/comments of the ONGC s representative/engineer without which no claim will be entertained by the ONGC. ***** ****** ***** 12.0 Discipline: CONTRACTOR shall carry out operations hereunder with due diligence and in a safe and workman like manner according to good international is oilfield practice. CONTRACTOR shall maintain strict discipline and good conduct among its employees and its SUB-CONTRACTOR s employees and shall abide by and conform to all rules and regulations promulgated by the CORPORATION governing the operations. Should CORPORATION feel that the conduct of any of CONTRACTOR/SUB-CONTRACTOR s employees is detrimental to CORPORATION s interest, the CORPORATION shall have the unqualified rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l laws including Labour Laws, rules, regulations and notifications issued thereunder from time to time. All safety and labour laws enforced by statutory agencies and by ONGC shall be applicable in the performance of this CONTRACT and CONTRACTOR shall abide by these laws. CONTRACTOR shall take all measures necessary or proper to protect the personnel, work and facilities and shall observe all reasonable safety rules and instructions. No smoking shall be permitted outside the living quarters, and welding jobs will be carried out with full safety precautions. ONGC s employee also shall comply with safety procedures/policy. The CONTRACTOR shall report as soon as possible any evidence which may indicate or is likely to lead to an abnormal or dangerous situation and shall take all necessary emergency control steps to avoid such abnormal situations. ***** ***** ***** ***** 16. Insurance: A) CONTRACTOR shall, at his own expense, arrange appropriate insurance to cover all risks assumed by the CONTRACTOR under this CONTRACT in respect of its personnel deputed under this CONTRACT as well as CONTRACTOR s equipment, tools and any other belongings of the CONTRACTOR on their person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 1000 A bare perusal of the provisions of the contract clearly show that the contract is basically for providing of services inasmuch as highly specialized machinery along with specialized staff is provided and the rates not only include the rates for hiring of machinery but also for the staff and the services provided by the staff. W.P(c) No. 315 of 2010: [31] In this case it is Mobile Rigs which are being supplied along with crew required to operate these Rigs. Para-1 of the contract reads as follows: 1. The Contractor agrees to perform the Services in accordance with the terms and conditions of this Contract and, in consideration of its due performance of the Services, the Company agrees to pay the Contractor according to the rates, terms and conditions herein contained in Appendix-5 (Schedule of Compensation) attached hereto. The other relevant portions of the contract are as follows: 3.1 Equipment of Personnel: The Drilling Unit shall be fully equipped as set out in Section II Scope of Works, and shall be adequate to conduct the Well Operations at the Location specified by Company and contemplated by this Contract. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd equipment. Clause 6.1.2 provides that the contractor shall be liable to furnish properly trained qualified and competent personnel as per the requirements of the contract. 7.0 MATERIALS, SUPPLIES, EQAUIPMENT, SERVICES AND PERSONNEL TO BE FURNISHED BY COMPANY: 7.1 Company Equipment: Company shall furnish all items stated as being furnished by Company in Section II. All such items, together with all items referred to in Clause 7.2 shall be referred to as Company Equipment All such items shall be furnished at no cost to Contractor unless otherwise specified in Section II. Contractor shall protect Company Equipment from damage or loss and exercise the same degree of care in handling and using Company Equipment as it would with its own equipment. ***** ***** ***** ***** 11.6 Discipline 11.6.1 Contractor shall maintain at all times strict discipline and good order among its employees and subcontractors and shall abide by and conform to all reasonable rules and regulations promulgated by Company governing Well Operations. 11.9 Rig Superintendent: Contractor shall appoint a Rig Superintendent who shall have the general responsibility for matters affecting s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing through the contracts we are of the view that the contracts are mainly for hiring of services. There may be a very small element of transfer of right to use goods but according to us the pre-dominant portion of the contract relates to hiring of services and not to transfer of right to use the goods. We are aware that the dominant nature test is not to be used in composite contracts falling within the ambit of Article 366(29A) but from the reading of the contract it is more than apparent that the intention of the parties was to treat the contract as a contract for hiring of services. Moreover, it is impossible to divide the contract into two separate portions. Every element of the digging directional wells and Mobile Drilling Rig service contains a major element of provisions of services. In such an eventuality it is virtually impossible to divide the contract. It is not possible to work out the value of the right to use goods transferred under the contract. In cases, where the contracts are easily divisible or where the parties have by agreement clearly indicated what is value of the service part and what is value of the transfer of right to use goods part, the contract may be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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