2011 (3) TMI 1506 - HC - VAT and Sales Tax

Court rules petitioner not liable for tax under Tripura Sales Tax Act for ONGC contract. Illegal demands deemed void.

The court held that the petitioner was not liable to pay tax under the Tripura Sales Tax Act, 1976 for the contract with ONGC as it did not involve a ... the contract, in the case at hand, is for rendering services and not for transfer of right to use equipment? Held that:- The contract agreement, in the present case, obliges the contractor to render the services of “welllogging, perforating and other wireline services” by using its own equipments and thereby no transfer of right to use equipments can be said to have taken place in the present case. Situated thus, it becomes clear, and we do hold, that the petitioner is not liable to pay tax, under the TST Act, 1976, in respect of the consideration received for the execution of contract, in question; hence, the action of the revenue authority, in raising the demand for deduction of sales tax at source treating the contract, in question, as transfer of the rights to use goods is wholly without jurisdiction and liable to be set aside and quashed, which we hereby accordingly do. Appeal allowed. Issues Involved:1. Constitutional validity of certain provisions of the Tripura Sales Tax Act, 1976 (TST Act, 1976).2. Definition and scope of 'dealer' and 'sale' under the TST Act, 1976.3. Legality of tax imposition on the transfer of the right to use goods.4. Validity of the demands for deduction of sales tax at source.5. Nature of the contract between the petitioner and ONGC regarding well-logging and other services.Detailed Analysis:1. Constitutional Validity of TST Act, 1976 Provisions:The writ petition challenged the constitutional validity of section 2(b) (definition of 'dealer'), section 2(d) (definition of 'sale'), and section 3 (charging provisions) of the TST Act, 1976. The petitioner argued that these provisions, which allow the imposition of tax on the transfer of the right to use goods, are unconstitutional.2. Definition and Scope of 'Dealer' and 'Sale':- Dealer: Section 2(b) defines 'dealer' as any person who sells taxable goods manufactured, made, or processed by him in Tripura or brought into Tripura for sale. However, it does not include persons involved in the transfer of the right to use goods.- Sale: Section 2(g) includes the transfer of the right to use any goods for any purpose within its definition. However, the court noted that the definition of 'dealer' does not encompass those who transfer the right to use goods, creating a discrepancy.3. Legality of Tax Imposition on Transfer of the Right to Use Goods:The court examined the power of State Legislatures to levy tax on the transfer of the right to use goods. It was noted that such power has limitations, including restrictions under Article 286 and Entry 54 of List II of the Seventh Schedule. The court referred to various judgments, including the 20th Century Finance Corporation Ltd. case, which clarified that the taxable event is the transfer of the right to use goods, not merely the use of goods.4. Validity of the Demands for Deduction of Sales Tax at Source:The petitioner contended that the demands for deduction of sales tax at source were illegal as the TST Act did not create a charge for the transfer of the right to use goods. The court agreed, noting that the rule-making authority cannot create substantive obligations not contemplated by the statute. Rule 3A(2) of the Tripura Sales Tax Rules, 1976, which provided for such deductions, was held ultra vires and invalid.5. Nature of the Contract Between Petitioner and ONGC:The court analyzed the contract between the petitioner and ONGC, determining whether it constituted a transfer of the right to use goods. The contract was found to be for the provision of services, with the equipment remaining under the control and possession of the contractor. Therefore, it did not amount to a transfer of the right to use goods, and no sales tax could be imposed on the contract.Conclusion:The court concluded that the petitioner is not liable to pay tax under the TST Act for the contract in question, as it does not involve a transfer of the right to use goods. The demands for deduction of sales tax at source were set aside and quashed. The judgment emphasized that the definitions and scope of 'dealer' and 'sale' under the TST Act must align with constitutional provisions and judicial interpretations.