Transfer of right to use goods fails where contractor retains control, making mine removal work a non-taxable works contract.

A contract for removal of overburden at a mine was treated as a works contract, not as a hiring arrangement involving transfer of the right to use heavy machinery. The decisive test was whether possession, custody and effective control of the machinery passed to the other party; here, the contractor used its own machinery, labour and materials, was paid by volume of overburden removed, and retained control throughout. Mere nomenclature as a hiring contract did not alter the substance of the transaction. The court held that there was no transfer of the right to use goods, so the arrangement was not taxable as a sale under the Bihar Finance Act, 1981, and the demand was unsustainable.

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Issues: Whether the contract for removal of overburden at the mines was a works contract and not a hiring arrangement involving transfer of the right to use heavy machinery, so as to attract sales tax under the Bihar Finance Act, 1981.

Analysis: Liability to sales tax on transactions involving works contracts and transfer of the right to use goods arises only where there is a real transfer of property in goods or of the right to use goods. The constitutional scheme under Article 366(29A) enlarges the concept of sale, but the decisive test remains whether possession, custody and effective control of the goods pass to the other party. The agreement and surrounding documents showed that the contractor had to execute the whole work with its own machinery, labour and materials, was paid on the basis of cubic metres of overburden removed, and retained control over the machinery throughout. The description of the arrangement as a hiring contract was held to be only nomenclature, while the substance of the transaction was performance of work. The machinery was never delivered to or controlled by the respondent so as to constitute a transfer of the right to use goods.

Conclusion: The contract did not amount to a taxable hiring transaction or transfer of the right to use goods. It was not exigible to sales tax under section 2(t)(iv) or the other relevant clauses of the Bihar Finance Act, 1981, and the demand raised against the contractor was unsustainable.

Final Conclusion: The writ petition succeeded, the assessment and demand orders were quashed, and it was declared that no sales tax was payable on the contract in question.

Ratio Decidendi: For a transaction to be taxed as a transfer of the right to use goods, the transferee must obtain possession, custody and effective control of the goods; where machinery remains with the contractor and is used only by the contractor to perform the work, the transaction is a works contract and not a taxable hiring arrangement.

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