2009 (9) TMI 879 - HC - VAT / Sales Tax

Cab hire contracts held pure services; no deemed sale under Article 366(29A)(d), DVAT Act tax invalid

HC held that the cab-hiring arrangement between the service provider and the company was a composite, indivisible contract for goods and services, with no ... Cabs Services - transfer of the right to use - Contract in question is a composite contract of sale of goods and services - Applicability of the DVAT Act to the transaction of hiring of Maruti Omni cabs by the respondent to a company, M/s. New Delhi Power Limited ('the NDPL') - Whether the transaction in question is 'sale' within the meaning of the expression in article 366(29A)(d)? - Held that:- It will be necessary to give a gist of the contract between the respondent and M/s. NDPL for hiring of Maruti Omni cabs by the former to the latter. Where the sale is distinctly discernible in the transaction, i.e., the contracts are by intention of the parties severable so that there are separate values with respect to goods and services, only then can one not deny the legislative competence of the State to levy sales tax on the value of the goods. This, however, does not allow the State to entrench upon the Union List and tax services by including the cost of such services in the value of goods. Even in the composite contracts, which are by legal fiction deemed to be divisible under article 366(29A), the value of the goods involved in the execution of the whole transaction cannot be assessed to sales tax. The conclusion, therefore, which emerges with respect to the facts of the present case on applying the ratio of the Bharat Sanchar Nigam Ltd.'s case [2006 (3) TMI 1 - SUPREME COURT], is that, since the contract in question is a composite contract of sale of goods and services, clearly, it is not permissible for the State Legislature by applying DVAT Act to tax composite contracts comprising of both goods and services. Not only the contracts cannot be artificially split up so as to enable the sale element to be taxed, but 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 entrenching 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. Also in the facts of the present case, we have found that control and possession of the vehicles is with the owner. The present appeal is not entitled to succeed because neither the transactions in question are sale of goods as envisaged in article 366(29A)(d) nor can the composite contracts be split up by taking from it the value of the goods for the purposes of taxing the same under the DVAT Act. Issues: (i) Whether the transaction of hiring Maruti Omni cabs amounted to a 'sale' within the meaning of article 366(29A)(d) by virtue of transfer of the right to use the goods; (ii) Whether the contracts are contracts for services (composite contracts) and hence not assessable to tax under the Delhi Value Added Tax Act, 2004, including whether a composite non-severable contract can be taxed as sale of goods.Issue (i): Whether the transaction transfers the right to use goods so as to constitute a 'sale' under article 366(29A)(d).Analysis: The statutory test requires attributes including availability of goods for delivery, consensus as to identity of goods, and that the transferee has the legal right to use the goods with accompanying permissions/licenses. The contract shows licences/permits and effective control of vehicles remained with the owner and the drivers; permissions and licences were not transferred to the hirer. Authority and tests in Bharat Sanchar Nigam Ltd. and related decisions were applied to assess whether effective control and possession passed to the transferee.Conclusion: The transaction does not amount to a 'sale' under article 366(29A)(d); the essential ingredient of transfer of the right to use (including transfer of relevant permissions/licenses and effective control) is absent.Issue (ii): Whether the contract is a contract for services (composite contract) and whether a composite non-severable contract can be taxed as sale of goods under the DVAT Act.Analysis: Constitutional and precedential principles establish that composite contracts of goods and services cannot be artificially severed except as specifically provided in article 366(29A). Where the parties have not intended severability and no separate values for goods and services are fixed, the State cannot treat the whole transaction as sale of goods without encroaching upon Union taxation of services. The contract was held to be a composite contract assessable as service under the Central enactment; treating the entire contract value as sale would create overlapping taxation contrary to constitutional allocation and precedent.Conclusion: The contracts are contracts for services (composite and non-severable) and are not assessable to sales tax under the DVAT Act; the State cannot tax the entire contract value as sale of goods.Final Conclusion: The appeal is dismissed; the DVAT Act cannot be applied to tax the transactions as sale of goods either because there is no transfer of the right to use the specific goods or because the composite, non-severable nature of the contracts precludes treating the whole transaction as a taxable sale of goods.Ratio Decidendi: A composite contract containing goods and services is not to be artificially severed for sales tax unless it falls within clauses of article 366(29A); a transfer of the right to use requires effective transfer of control, possession and accompanying permissions/licenses, absence of which precludes characterisation as a 'sale' under article 366(29A)(d).