TMI Blog2018 (1) TMI 614X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the essential ingredients of a sale as defined in the State of Goods Act, 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax. The amendment especially allows specific composite contracts viz., works contract [sub-clause (b)]; hire-purchase contracts [subclause (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. The court has observed that 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 involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in sub-clauses (b) and (f) of clause (29-A) of Article 366, there is no other service which has been permitted to be so split. The contract between the petitioners and the ONGC does not involve any transfer of the right to use goods and resultantly there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Central Sales Tax Act, 1956. Alternatively, the petitioners seek a direction to the Union of India to transfer the amount of service tax collected on the workover service contracts towards the alleged VAT liability on the transactions as determined by the authorities of the State of Gujarat. 2. The facts as averred in the petition are that the petitioners are engaged in providing services such as, gas compression and workover services to companies such as, Oil and Natural Gas Corporation Ltd. (hereinafter referred to as ONGC ), who are engaged in exploration of oil and natural gas. The petitioners are duly registered under the VAT Act as well as under the Finance Act, 1994 (hereinafter referred to as the Finance Act ) for the purpose of discharging service tax liability. The petitioners entered into contracts with customers for provision of services. Insofar as the workover services are concerned, the contract specifically provides that the services would be provided by the employees of the petitioners by using workover rigs specifically imported for the purpose of the contract from vendors approved by the customer. 3. It is the case of the petitioners that all the contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discharged service tax liability at the rate of 12.36% under the Finance Act on the consideration received from the clients. While the petitioners duly filed returns under the GVAT Act, they did not admit any liability of tax under the GVAT Act since according to the petitioners the contracts do not involve any sale/deemed sale of goods. 5. A show cause notice dated 16.1.2015 came to be issued to the petitioners by the Assistant Commissioner of Commercial Tax, requiring the petitioners to show cause as to why tax should not be imposed under the GVAT Act on the gas compression contracts as well as the workover service contracts on the ground that they involved transfer of right to use goods and therefore, they were deemed sales under the GVAT Act. 6. In response thereto, the petitioners submitted a detailed written reply on 10.3.2015 contending that the gas compression as well as workover service contracts were pure service contracts not liable to tax under the GVAT Act. Alternatively, it was contended that in any case the workover rigs were specifically imported for the purpose of the contracts from foreign vendors, pre-approved by the clients, and hence, if at all the contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invited the attention of the court to various clauses of the agreements, reference to which shall be made at a later stage. It was submitted that the contracts entered into by the Petitioners with clients such as ONGC is for performance of various activities and operations using workover rig which is owned by the petitioners. There is no transfer of effective possession and control by the petitioners in favour of clients such as ONGC and therefore, the contracts do not involve any deemed sales by way of transfer of right to use goods under section 2(23) of the GVAT Act. Referring to various clauses of the agreement, it was, inter alia, submitted that in view of clauses 5.4 and 5.2.1 of the agreement, ONGC s role was restricted to supervision of the entire activities, whereas the contractor s representative had complete charge of the contractor s personnel who were engaged in the performance of the work. It was pointed out that in terms of clause 7.1 of the agreement, remuneration was fixed under the contract for the services to be provided under the contract as per the scope of work and provisions of contract agreement. Consolidated day rates were stipulated by way of considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioners are composite indivisible contracts and therefore they cannot be taxed under the GVAT Act. Reliance was placed upon the decision of the Supreme Court in the case of Bharat Sanchar Nigam Ltd. v. Union of India, 145 STC 91 (SC), wherein the court has held that even after the 46th Constitutional Amendment only three different kinds of composite transactions could be severed by fiction works contract, hire-purchase contract and catering contract. 10.3 Reliance was also placed upon the decision of the Madras High Court in the case of Aban Loyd Chiles Offshore Ltd. v. State of Tamil Nadu, 53 VST 89 (Madras) , wherein in relation to a contract for drilling operations for the ONGC for using drilling rigs, the court held that the nature of work entrusted to the contractor was only to render services in drilling operations with its own personnel and the effective control of the rigs remained with the contractor. The ONGC only gave directions where the rigs were to operate and hence, there was no transfer of right to use the drilling rigs. Reference was also made to the decision of the Tripura High Court in the case of Quippo Oil and Gas Infrastructure Ltd. v. State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment are provided by the dealer and maintenance/fuel expenses are also borne by the dealer then there is no transfer of right to use goods. (d) If the contract is for achievement of some work then it is a service contract and not a contract for transfer of right to use goods. (e) If contract involves complex services then it cannot be taxed as involving transfer of right to use goods. (f) The fact that a particular equipment is used exclusively for one customer at a particular period of time does not ipso facto mean that the right to use such equipment is transferred. (g) Nature of transactions need to be determined on the basis of substance of the contract and not title/nomenclature. 10.6 It was submitted that if the above principles are applied to the facts of the present case, then the conclusion is inescapable that there is no transfer of right to use workover rigs by the petitioners to the ONGC and other such clients and that the contracts are service contracts amenable to levy of service tax. It was submitted that the title of the agreement which refers to hiring has weighed upon the Tribunal while holding that there was a transfer of right to use goods. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s essentiality certificate on the basis of which rigs are imported without payment of customs duty. It is not open for the petitioners to divert the rigs for any other use. Thus, assuming without admitting that the contracts involve deemed sales by way of transfer of right to use goods, even then, such deemed sales are in the course of import and therefore not taxable by virtue of Article 286 of the Constitution of India read with section 5(2) of the Central Act and section 4 of the GVAT Act. 10.9 Another alternative submission raised by the learned advocate for the petitioners was that if at all the workover contracts are considered to be involving deemed sales by way of transfer of right to use goods, then retention of service tax on such consideration by the second respondent is wholly without jurisdiction. Such double taxation is also arbitrary and violative of Article 14 of the Constitution of India. Therefore, the Union of India may be directed to transfer the amount collected by way of service tax to the State of Gujarat, inasmuch as, the petitioners cannot be made to suffer double tax on the same transaction even though admittedly one of the two taxes is without jurisdic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GC shall not allow substitution of the rig under any circumstances. It was submitted that thus, the parties have agreed that the officials of the ONGC are also empowered to ensure proper utilization of the rigs that are being installed by the petitioners. It was contended that the terms and conditions of the contract clearly show that the effective control vests in the ONGC. It was submitted that the opening part of the contract clearly indicates that the intention of the parties was to enter into a contract of hiring. It was submitted that the petitioner was required to operate the rigs according to the advice, guidance, suggestions and instructions of the ONGC which also shows that the effective control was of the ONGC. Thus, on an overall view of the clauses of the contract, it is evident that there has been a transfer of the right to use the workover rigs. 11.1 Next, it was submitted that the relevant clauses of the contract reveal that the contract between the petitioners and the ONGC is a composite contract for providing goods and service. The entire workover operations are to be strictly carried out as per the planning and program of the ONGC and the petitioner is not fre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract entered into between the ONGC and the petitioners, the present case falls within the ambit of taxable service in relation to mining of mineral, oil or gas. Dealing with the alternative submissions made on behalf of the petitioners regarding transfer of service tax to the State of Gujarat for the GVAT liability, it was submitted that the service tax is charged on the mining service provided by the petitioners. The petitioners have obtained registration under the service tax for providing such services. When mining service is taxable, the question of transfer of service tax collected as against the State Value Added Tax liability does not arise. It was submitted that the service tax is a central tax levied and collected by the Central Government and there is no question of transfer of the tax so collected to the State Government. 13. In rejoinder, Mr. Uchit Sheth, learned advocate for the petitioners submitted that one of the main grounds advanced on behalf of the respondents and which has prevailed over the Tribunal is that the workover operations are to be carried out as per the planning and programme of ONGC, it was submitted that such reasoning is perverse in the leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contractor) performing any function relating to the contract. Duration of the contract is set out in clause 3.0 of the agreement. Clause 5.0 sets out Duties and Power/Authority and reads as under: 5.0 DUTIES AND POWER/AUTHORITY: 5.1 The duties and authorities of the ONGC s site representative are to act on behalf of the ONGC for: ( i) Overall supervision, co-ordination and Project Management at site ( ii) Proper utilisation of equipment and services. ( iii) Monitoring of performance and progress ( iv) Commenting/countersigning on reports made by the CONTRACTOR s representative at site in respect of works, receipts, consumption etc. after satisfying himself with the facts of the respective cases. ( v) He shall have the authority, but not obligation at all times and any time to inspect/test/examine/verify and 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement provides for Scope of Work . Clause 1.0 thereof bears the heading Scope of Work . Clause 1.1 thereunder, inter alia , provides that the contractor shall provide complete workover rig along with associated rig equipment and personnel, all conforming to the indicated specifications and maintain and operate the rig, so as to carry out workover operations at all such locations and up to defined depths as identified by ONGC from time to time. It further provides that the contractor shall ensure the aspects enumerated thereunder. Clause 1.3 provides for Equipment and services to be provided by the contractor and says that the contractor shall provide complete workover rig with trucking equipment along with personnel, equipment, material and supplies required to perform the workover jobs and other services as set forth therein. The workover rig and the equipments shall conform to the technical specifications as per contract and shall satisfy Indian Regulations in force. Clause 1.3.13 says that the contractor shall provide adequate security arrangements for the rig and equipment at well site and all relevant establishments in connection with the rig operations. Clause 1.3.17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oted by the contractor and agreed by ONGC. Charges on this head will include all activities intimated after the rig building is complete and first operation in the well has been started to the last operation carried out at the present site before the release of rig excluding those indicated in succeeding paras on stand by rate R-II and repair rate R-III. 4.2 STANDBY DAY RATE R-II : ONGC shall pay contractor as standby rate R-II payable for following operations. [ a] Interruption/delay in moving rig due to ONGC having failed to give prior notice and proper access to next location. [ b] Pressure testing of well head, choke manifold; BOP stack, kill and choke line, etc. as per instructions of ONGC representative. [ c] Logging and perforation of hole. [ d] Repairing damage to contractor s equipment caused by actions of ONGC/ONGC s contractor other than workover contractor (contractor). [ e] Waiting on ONGC order/material/services whilst draw works and mud pump is not being operated, irrespective of contractor s other equipment in use. [ f] Waiting on wire line work or cement plug to set in a hole. [ g] Well evaluation / tes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms and all personnel on board the workover Unit. The extent of Contractor s responsibility shall include but not limited to making final decision regarding:- ( 1) Evaluation of inspection and survey conducted by Operator of the well site to determine whether or not the Workover Unit can be positioned at the site of operations considering the conditions at the site or maintained in position the same during the operations. ( 2) Whether or not the Workover Unit may be safely rigged up / down on a location. ( 3) Subject to clause 21 of Appendix-7, Well Control Measures, Actions and Procedures affecting the containment of existing or potential escape of pressures which could lead to blowouts, cratering, or similar catastrophe. 25. Clause 25 provides for Responsibility for Loss of or Damage to the Equipment or the Hole . Clause 25.1 relates to Loss of Contractor s Workover Unit and says that except as otherwise specifically provided in the Agreement, any damage to or loss, of the Workover Unit (which, for the purpose of the clause shall be deemed to include all Contractor s and its subcontractor s equipment) and regardless of the cause or reason for said, lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides that the contractor s representative shall have all the powers requisite for the performance of the work. Thus, while the overall supervision of the project is carried out by the representative of the ONGC, the actual work is executed by the contractor through his representative and all the contractor s personnel are under his charge. Clause 7.0 which relates to remuneration and terms of payment, is an important clause to discern the intention of the parties as to whether they intended the contract to be one of hiring of rigs, in other words, to transfer the right to use the rigs or whether they intended it to be a contract of service only. Clause 7.1 provides that the Corporation shall pay to the contractor for the services to be provided by the contractor as per the scope of work and provisions of contract as per schedule of rates at Appendix-10. The schedule of rates at Appendix-10 shows that the rates are fixed inclusive of service tax. Such rates are on per operating day and non-operating day basis. There is no bifurcation of rates for hiring of the rigs and for service provided by the contractor. 28. The scope of the work as set out in the letter of award, Appendix-11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e contractor shall at all times, have full responsibility for control, direction and supervision of operations being carried out under the agreement except when and to the extent that the operator assumes control and supervision of operation. 29. Clause 26.2, therefore, also gives an indication that in the ordinary course, the ONGC does not have the right to use the workover unit and the contractor s equipment and personnel, except in the exceptional circumstances stated therein. 30. As noted earlier, clause 3.0 of the Special Conditions of Contract, which bears the heading Payments to Contractor , provides for the rates for the work performed etc. Clause 4.0 thereof provides for day rates and categorizes the rate payable to the contract per day in three categories. On operating day rate R-I, standby day rate R-II and break-down and break down day rate R-III. Thus, the rates for payment to the contractor, nowhere envisage any bifurcation of the charges for transfer of right to use and for the services rendered by the petitioners. Consequently, even if it were to be held that the contract is a composite one with an element of service and an element of transfer of the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 above decision would be squarely applicable to the present case, inasmuch as the parties have not intended the contract to be severable as no different values have been specified in the subject contract towards the transfer of right to use value separately and the value of services separately. In the opinion of this court, on a plain reading of the contract executed between the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oat charter on the other is that under the first two categories, the ship remains under the control of the owner, as to manning and navigation. In the case of demise or bare boat charter, the control shifts to the charterer. 46. In the case on hand, the parties to the contract have used the expression charter hire, only because of the fact that they were dealing with offshore drilling rigs. Articles 3.0, 4.0 and 9.2 of the agreement make it clear that the agreement between the parties does not fall under the category of a charter similar to a demise or bare boat charter. The terms of the agreement makes it clear that the entire control with regard to manning, operating and navigating was retained by the petitioner herein. Once this is clear, it follows as a corollary that there was no transfer of the right to use. Thus, the mere use of the words charter hire in relation to workover rigs would not change the nature of the contract to one of transfer of right to use goods when there is none. 33. Great stress has been laid by the learned Assistant Government Pleader on clause 15 of the Special Conditions of contract, which provides for non-substitution of rig, to submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person to whom such transfer, delivery or supply is made; 41. Sub-clause (a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale. Sub-clause (b) covers cases relating to works contracts. This was the particular fact situation which the Court was faced with in Gannon Dunkerley, [1958] 9 STC 353 (SC), and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley was directly overcome. Sub-clause (c) deals with hire-purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarly the title to the goods under sub-clause (d) remains with the transferor who only transfers the right to use the goods to the purchaser. In other words, contrary to A.V. Meiyappan decision [1967] 20 STC 115 (Mad) a lease of a negative print of a picture would be a sale. Sub-clause (e) covers cases which in law may not have amounted to sale because the member of an incorporated association would have in a sense begun as b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kerley case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366(29-A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract . We will, for the want of a better phrase, call this the dominant nature test. 49. We agree. After the Forty-sixth Amendment, the sale element of those contracts which are covered by the six sub-clauses of clause (29-A) of Article 366 are separable and may be subjected to sales tax by the States under Entry 54 of List II and there is no question of the dominant nature ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the other there was. 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 goods-consequently 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 again transfer the same rights to others. 33. Thus, the court has held that all the sub-clauses of Article 366(29-A) of the Constitution serve to bring transactions where one or more of the essential ingredients of a sale as defined in the State of Goods Act, 1930 are abs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces and exchange are in the physical control and possession of the petitioner at all times and there is neither any physical transfer of such goods nor any transfer of right to use such equipment or apparatuses. 98. 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 goods consequently 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 again transfer the same rights to others. 36. It may be noted that on behalf of the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to use goods. 37. In State of Andhra Pradesh v. Rashtriya Ispat Nigam Ltd . (supra), the respondent allotted different works to contractors and supplied sophisticated machinery to the contractors for being used in the execution of the contracted works and received charges for the same. The court, on a consideration of the agreement of the respondent with the contractors found that the effective control of the machinery, even while the machinery was in use, was with the respondent: the contractors were not free to make use of the machinery for other works or move the machinery out during the period the machinery was in use, and held that the transaction did not involve the transfer of right to use machinery in favour of the contractors and the hire charges could not be brought to tax under section 5-E of the Andhra Pradesh General Sales Tax Act, 1957. In the present case, the petitioners stand on a much stronger footing. The workover rigs are owned by the petitioners; it is the petitioners who are using the workover rigs to execute the agreement with the ONGC; the control of the workover rigs at no point of time is handed over to the ONGC and remains with the petitioners a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be that as per the requirement of ONGC, fixed time was assigned to them and during that fixed time of the day, staff members of ONGC would come to the office of the respondents to get their work done but during all that period, computers would be operated by the employees of the respondents and not by the employees of the ONGC. Merely because a person agrees to provide service to a particular customer during a particular period of time of day to the exclusion of all other customers for the purpose of convenience, it does not mean that goods have been actually delivered to that particular customer to the exclusion of not only other customers but also to the exclusion of owner himself. Nature of the contract and the transaction between the respondents and the ONGC was nothing more than service contract whereby certain services were provided by the respondents to the ONGC. There is nothing to show that the constructive possession of the computers and other instruments was with ONGC at any time. To that extent, the question no.2 is not correct. In view of the language of Sections 3 and 4 tax shall be leviable on the turnover of sales in respect of transfer of right to use any go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners. The above decision therefore, has no applicability to the facts of the present case. 42. Various other decisions as enumerated hereinabove, laying down similar propositions of law, have been relied upon by the learned counsel for the petitioners, however, with a view to avoid repetition the court does not deem it necessary to refer to all of them in detail. 43. In the light of the above discussion, this court is of the view that the contract between the petitioners and the ONGC does not involve any transfer of the right to use goods and resultantly there is no deemed sale attracting the levy of value added tax on such transaction. The contention of the petitioner that the transaction is only for providing the service of workover operation and nothing more, therefore, deserves to be accepted. 44. The upshot of the above discussion is that the contract entered into between the petitioner and the ONGC for workover operations of oil wells of ONGC is a pure contract of services to the ONGC. The impugned order passed by the Tribunal which holds that the contract dated 8.7.2008 entered into between the petitioner and the ONGC is a composite contract involving both the eleme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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