2014 (7) TMI 659 - HC - VAT and Sales Tax

Court rules service providers not liable for VAT under MVAT Act, 2003.

Tata Consultancy Services Ltd. and Another Versus State of Meghalaya and Others

The court held that the respondents' deduction of tax at source under the Meghalaya Value Added Tax Act, 2003 was illegal as the petitioners were service ... Deduction of tax at source - deemed sale - transfer of right to use - whether under the project, the petitioners are simply service provider or they are making project for sale of their equipments under the works contract - services in the field of information and technology - to provide data connectivity, voice and video services - Held that:- sub-clause (d) of clause (29A) of article 366 of the Constitution provides transfer of right to use any goods for any purposes is inclusive in the expression 'tax on sale or purchase of goods' but in the present case, since the personnel of the petitioners-company have not handed over their possession and control over the equipments for providing services to MSWAN as such said sub-clause cannot be said to have been attracted. Action taken by respondents No. 1 to 5 regarding tax deduction at source under Meghalaya Value Added Tax Act, 2003 against the petitioners who are service providers and who have not transferred the equipments to the respondents, is illegal and it is made clear that the petitioners are not liable to make payment of sales tax on the equipments unless the same are transferred under the agreement executed between the petitioners and respondent No. 4. It is apparent to mention here as per the terms and agreement, that the petitioners are still in possession and control of the equipments by which the service MSWAN is being provided to the State of Meghalaya. - Decided in favour of assessee. Issues Involved:1. Deduction of tax at source under the Meghalaya Value Added Tax Act, 2003.2. Classification of the contract as a 'works contract' or a service agreement.3. Ownership and transfer of equipment under the BOOT (Build, Own, Operate, Transfer) model.4. Applicability of VAT on the imported equipment used in the MSWAN project.5. Compliance with previous court orders regarding tax deductions.6. Registration under the MVAT Act, 2003 and Central Sales Tax Act, 1956.Issue-wise Detailed Analysis:1. Deduction of tax at source under the Meghalaya Value Added Tax Act, 2003:The petitioners challenged the deduction of tax at source by the respondents under the Meghalaya Value Added Tax Act, 2003. The court examined whether the deductions were justified given the nature of the agreement between the petitioners and the State Government. The court concluded that the action of deducting tax at source from the quarterly guaranteed revenue charges payable to the petitioners was illegal as the petitioners were service providers and had not transferred the equipment to the respondents.2. Classification of the contract as a 'works contract' or a service agreement:The court analyzed whether the agreement constituted a 'works contract' or a service agreement. It was determined that the petitioners were providing network services under a BOOT model and retained ownership and control of the equipment during the contract period. Therefore, the contract was classified as a service agreement rather than a 'works contract.'3. Ownership and transfer of equipment under the BOOT model:The agreement specified that the petitioners would retain control and possession of the equipment throughout the five-year contract period, after which the equipment would be transferred to the State Government for a nominal fee. The court noted that since the petitioners were still in control and possession of the equipment, there was no transfer of ownership or right to use the goods during the contract period.4. Applicability of VAT on the imported equipment used in the MSWAN project:The court considered whether VAT was applicable to the imported equipment used in the MSWAN project. It was concluded that since the equipment was imported for providing services under the agreement and the petitioners retained ownership and control, the transaction could not be classified as a 'sale' under the MVAT Act. Consequently, VAT was not applicable.5. Compliance with previous court orders regarding tax deductions:The court reviewed compliance with a previous order from the Gauhati High Court, which directed the respondents to determine the prima facie taxable turnover and make deductions accordingly. The respondents were instructed to bifurcate the amount involved in the supply of materials and determine whether the petitioners supplied the materials free of cost. The court found that the respondents' actions did not comply with the previous order and reiterated that no tax should be deducted from the service component of the contract.6. Registration under the MVAT Act, 2003 and Central Sales Tax Act, 1956:The respondents had directed the petitioners to register under the MVAT Act, 2003 and the Central Sales Tax Act, 1956. The petitioners complied under protest, asserting that they were not liable to pay VAT. The court supported the petitioners' position, stating that since the petitioners were service providers and had not transferred the equipment, they were not liable to pay VAT on the imported goods.Conclusion:The court declared that the action by respondents No. 1 to 5 regarding tax deduction at source under the MVAT Act, 2003 was illegal. The petitioners were not liable to make payment of sales tax on the equipment unless the same were transferred under the agreement. The writ petition was allowed in respect of the reliefs sought, and no order was made as to costs.