2002 (3) TMI 705 - SC - VAT / Sales Tax

Court rules hire charges for machinery not subject to sales tax under Andhra Pradesh GST Act.

State of Andhra Pradesh and another Versus Rashtriya Ispat Nigam Ltd.

The Supreme Court upheld the High Court's decision that hire charges for the transfer of the right to use machinery were not subject to sales tax under ... Whether there was a transfer of right to use the machinery by the respondent in favour of the contractors by collecting hire charges looking to the clauses contained in the agreement? Held that:- The High Court after scrutiny and close examination of the clauses contained in the agreement and looking to the agreement as a whole, in order to determine the nature of the transaction, concluded that the transactions between the respondent and contractors did not involve transfer of right to use the machinery in favour of the contractors and in the absence of satisfying the essential requirement of Section 5E of the Act, i.e., transfer of right to use machinery, the hire charges collected by the respondent from the contractors were not exigible to sales tax. On a careful reading and analysis of the various clauses contained in the agreement and, in particular, looking to clauses 1, 5, 7, 13 and 14, it becomes clear that the transaction did not involve transfer of right to use the machinery in favour of contractors. The High Court was right in arriving at such a conclusion. In the impugned order, it is stated, and rightly so in our opinion, that the effective control of the machinery even while the machinery was in use of the contractor was that of the respondent company; the contractor was not free to make use of the machinery for the works other than the project work of the respondent or move it out during the period the ‘machinery was in his use; the condition that the contractor would be responsible for the custody of the machinery while it was on the site did not militate against respondent’s possession and control of the machinery. It may also be noticed that even the Appellate Deputy Commissioner, Kakinada in the order dated 15-11-1999 in regard to assessment years 1986-87 and 1987-88 held that under the terms and conditions of the agreement, there was no transfer of right to use the machinery in favour of the contractor. Although it cannot be said that the appellant was estopped from contending otherwise in regard to assessment year 1988-89, it is an additional factor and circumstance, which supports the stand of the respondent. Appeal dismissed. The Supreme Court of India considered the issue of whether there was a transfer of the right to use machinery by the respondent to contractors, thereby attracting sales tax liability under Section 5E of The Andhra Pradesh General Sales Tax Act, 1957. The respondent, who owned the Visakhapatnam Steel project, supplied sophisticated machinery to contractors for use in executing contracted works and collected hire charges for the same. The appellant levied tax on the hire charges under Section 5E, leading to a writ petition by the respondent challenging the legality of the tax.The High Court analyzed the clauses of the agreement between the respondent and contractors to determine the nature of the transaction. It concluded that there was no transfer of the right to use machinery to the contractors, as required by Section 5E of the Act. The High Court specifically examined clauses 1, 5, 7, 13, and 14 of the agreement and found that the respondent retained effective control over the machinery even while it was in use by the contractors. The contractors were not free to use the machinery for purposes other than the project work, and the condition that the contractor was responsible for the custody of the machinery did not negate the respondent's possession and control. The Appellate Deputy Commissioner also held in a previous order that there was no transfer of the right to use machinery to the contractors based on the agreement's terms and conditions.The Supreme Court upheld the High Court's decision, finding no fault with it. The Court agreed that there was no transfer of the right to use machinery to the contractors, and therefore, the hire charges collected by the respondent were not subject to sales tax under Section 5E. The Court dismissed the appeal, directing each party to bear their respective costs.In conclusion, the Supreme Court determined that there was no transfer of the right to use machinery from the respondent to the contractors, as required by Section 5E of the Act, and upheld the High Court's decision that the hire charges were not subject to sales tax.