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

Hiring of passenger vans is composite goods-and-services contract; lacking separate valuation, not sale under article 366(29A)(d)

Commissioner, VAT, Trade and Taxes Department Versus International Travel House Ltd.

HC held that the hiring contract for passenger vans was a composite contract of goods and services and, lacking separate valuation for each element, could ... 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 Involved:1. Whether the transaction in question is a 'sale' within the meaning of Article 366(29A)(d)Rs.2. Whether the contracts in question are contracts for services and hence not assessable to tax under the DVAT ActRs.Issue-wise Detailed Analysis:1. Whether the transaction in question is a 'sale' within the meaning of Article 366(29A)(d)Rs.The court examined the nature of the transaction between the respondent and NDPL, which involved the hiring of Maruti Omni cabs. The appellant argued that the transaction constituted a sale because there was a transfer of the right to use the goods for valuable consideration. They contended that effective control and possession of the cabs were with NDPL, meeting the requirements of Article 366(29A)(d).However, the respondent countered that effective control and possession of the cabs remained with them, as the vehicles were driven by their drivers, and all necessary licenses and permissions were in the respondent's name. The court referred to the Supreme Court's decision in Bharat Sanchar Nigam Ltd. v. Union of India, which provided the test for determining whether a transaction is a sale. The court concluded that the transaction did not constitute a sale because the respondent retained effective control and possession of the cabs, failing to meet the criteria outlined in Bharat Sanchar Nigam Ltd.2. Whether the contracts in question are contracts for services and hence not assessable to tax under the DVAT ActRs.The court analyzed whether the transaction could be taxed under the DVAT Act, given that it included elements of both goods and services. The appellant argued that the presence of goods in the transaction allowed for taxation under the DVAT Act. They cited the measure of tax being 100% of the contract value, asserting that the inclusion of services did not change the nature of the tax.The respondent argued that the transaction was primarily for services and was already subject to service tax under the Finance Act, 1994. They contended that the DVAT Act could not apply as it would conflict with the central legislation governing service tax.The court referred extensively to the Bharat Sanchar Nigam Ltd. decision, which emphasized that composite contracts involving both goods and services could not be artificially severed to tax the goods component separately. The court noted that the contract in question did not specify separate values for goods and services, indicating the parties' intention for it to be treated as a single, inseverable contract for services.The court concluded that the DVAT Act could not be applied to tax the entire transaction value as a sale of goods. The contract was deemed a composite contract for services, and taxing it under the DVAT Act would lead to overlapping taxation, which must be avoided. The court also referenced the Supreme Court's decision in Godfrey Phillips India Ltd. v. State of U.P., which stressed the need for clarity and precision in taxing entries to avoid conflicts between state and central legislation.Conclusion:The court held that the transaction in question did not constitute a sale under Article 366(29A)(d) and that the contracts were primarily for services, not assessable to tax under the DVAT Act. The appeal was dismissed, with each party bearing its own costs.