Introduction There are a number of transactions in the commercial world which are to be executed by the doer with use of various equipments and instruments. There may also be such situations where the doer may be working for one specific customer for a sufficiently long period of time. Under above circumstances a question arises whether such transaction is for providing services or it is to be treated as ‘deemed sale’ by way of “transfer of right to use goods” i.e. lease transaction, which can be made liable under Sales Tax Laws.
By now there are a number of judgments and it can be said that the situation is very fluid in as much as there are contradictory judgments including from the Hon’ble High Courts.
Quippo Oil and Infrastructure vs. State of Tripura (77 VST 547) (Trip)
This is one of the latest judgments from the High Court of Tripura deciding on the controversy as referred to above. There were a number of petitions, but the facts as noted by the Hon. High Court in one of the cases, can be referred to as under:
The petitioner companies in this case entered into a contract with the ONGC for digging directional wells. As per the petitioners, digging directional wells has many components including Drilling Rig, Logging Services, Cementing, Mud Engineering, Directional Drilling etc. Directional drilling is one of the components of digging a directional well. According to the petitioners they have entered into a service contract providing service of directional drilling, and therefore, they are paying service tax to the Central Government. The petitioners contend that the contract does not amount to sale and no VAT can be levied on the same.
Based on above facts, the Hon. High Court has discussed the issue at length. The rival submissions are noted by the Hon. High Court by observing as under:
“The case of the State is that since a tax on the sale or purchase of goods includes in terms of sub-clause (d) of Article 366(29A) tax on the transfer of the right to use any goods for any purpose the petitioners are liable to pay value added tax on such transfer of right to use goods. The contention of the petitioners is that they have entered into a service contract and only the Union can levy tax on services and not the State. The petitioners have also urged that they are paying service tax to the Central Government under the provisions of law and since they are paying service tax, if there is conflict between the Central Law and the State Act the Tripura Value Added Tax Act must necessarily give way to the provisions which provide for imposition of service tax in the Finance Act of 1994.”
The Hon. High Court has referred to a number of citations, and, after full discussion arrived at the following conclusion:
“[33] As has been held by the Apex Court either a transaction shall be exigible to sales tax/VAT or it shall be exigible to service tax. Both the taxes are mutually exclusive. Whereas sales tax and value added tax can be levied on sales and deemed sales only by the State, it is only the Central Government which can levy service tax. No person can be directed to pay both sales tax and service tax on the same transaction. The intention of the parties is clearly to treat the agreement as a service agreement and not a transfer of right to use of goods. We are also clearly of the view that it is impossible from the terms of the contract to divide the contract into two portions and since the petitioners have paid service tax they cannot be also asked to pay value added tax. As held by the Delhi High Court in Commissioner, VAT , Trade and Taxes Department vrs. International Travel House Ltd. (supra), if there is a conflict between the Central law and the State Act then the Central law must prevail. The petitioners cannot be burdened with two different taxes for the same transaction.
[34] After carefully going 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 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.
[35] 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.
[36] In view of the above discussion, we are clearly of the view that in all the cases the transactions do not amount to sale within the meaning of the TVAT Act, 2004. Therefore, all the writ petitions have to be allowed. The State is not entitled to levy any sales tax or Value Added Tax on the transactions in question. It is, therefore, directed that the amount of tax, already deducted and received by the State shall be refunded to the petitioners along with statutory interest latest by 28th February, 2015. In case the amount is not refunded by that date then the State shall be liable to pay interest @12% per annum with effect from 1st January, 2015.”
Conclusion
The above judgment is one of the determinative judgments which is very clear in its verdict. The laws laid down by the Hon. High court will certainly be guiding law for time to come. The businesses, at present, are very much under pressure due to an attempt by both the authorities to levy Service tax as well as VAT . The nature of transaction is to be decided by its dominant nature and if it is for providing services, then even if some element of leasing of instrument etc. is involved, it cannot be enforced by State Authorities. The Service Tax should prevail over Sales Tax/VAT . We expect that taking note of the above judgment, the sales tax department will not ask to pay sales tax where Service Tax is already paid as well as if at all the transaction attracts sales tax then the departments will make adjustment of payment inter-se and not ask the dealer to discharge double tax. This will be a real relief to the dealers.
