2015 (5) TMI 461 - HC - VAT and Sales Tax

Court rules agreement not a transfer of right to use goods under DVAT Act, overturns VAT imposition and penalty

The court held that the agreement between the appellant and Delhi Transport Corporation did not amount to a transfer of the right to use goods, thus not ... Transfer of the right to use goods - deemed sale under Article 366(29A)(d) - sale versus service - effective control and possession - goods must be available and deliverable - impermissibility of severing composite contracts to tax sale elementTransfer of the right to use goods - deemed sale under Article 366(29A)(d) - sale versus service - effective control and possession - goods must be available and deliverable - impermissibility of severing composite contracts to tax sale element - The agreement for hiring two buses to DTC did not amount to transfer of the right to use the goods so as to constitute a deemed sale liable to VAT under the definition of 'sale' in the DVAT Act. - HELD THAT: - The Court examined the contractual terms and applied the legal tests in Article 366(29A)(d) and the decisions in Bharat Sanchar Nigam Ltd. and International Travel House Ltd. The decisive factors are whether goods are ultimately delivered or deliverable and whether effective control and legal incidents of use pass to the transferee. Here the registered owner retained custody, registration, licences and primary responsibility for maintenance, insurance, fitness, indemnity and liabilities; the buses were to be made available for deployment on specified routes with owner's drivers and the owner remained obliged to keep the vehicles roadworthy and available. Although DTC collected fares and directed deployment, those stipulations did not amount to transfer of exclusive legal right to use or delivery of the goods to DTC. The Tribunal erred in treating the contractual regime as conferring effective control and exclusive possession on DTC and in rejecting the ratio of International Travel House Ltd.; the contract therefore did not satisfy the attributes of a transfer of right to use goods under Article 366(29A)(d) and similar provision in the DVAT Act, and could not be taxed as a deemed sale. Having reached this conclusion, the Court did not find it necessary to adjudicate the severability or service-tax aspects further. [Paras 33, 34, 36, 37, 38]The transaction is not a transfer of right to use goods/deemed sale under Article 366(29A)(d) or the DVAT Act and therefore is not liable to VAT as held by the authorities below.Final Conclusion: The substantial question of law is answered against the Revenue; the impugned orders imposing tax and penalty for Assessment Year 2005-06 are set aside and the appeal is allowed. Issues Involved:1. Whether the agreement between the appellant and Delhi Transport Corporation (DTC) constituted a transfer of the right to use goods, thus liable to VAT under Section 2(zc)(vi) of the DVAT Act.2. The imposition of VAT and penalty by the Value Added Tax Officer (VATO) and its affirmation by the Objection Hearing Authority (OHA) and the Tribunal.3. The applicability of Article 366(29A)(d) of the Constitution concerning the definition of 'sale.'Issue-wise Detailed Analysis:1. Transfer of the Right to Use Goods:The primary issue was whether the agreement between the appellant and DTC for hiring two Deluxe buses constituted a transfer of the right to use goods, thereby attracting VAT under Section 2(zc)(vi) of the DVAT Act. The court examined the definition of 'sale' under Section 2(1)(zc) of the DVAT Act, which includes 'transfer of the right to use any goods for any purpose for cash, deferred payment, or other valuable consideration.' The court also referenced Article 366(29A)(d) of the Constitution, which similarly defines 'tax on the sale or purchase of goods' to include a tax on the transfer of the right to use goods.2. Imposition of VAT and Penalty:The VATO had imposed VAT on the hire charges received by the appellant from DTC, treating the transaction as a deemed sale due to the transfer of the right to use the buses. Additionally, a penalty was imposed for the appellant's failure to register under the DVAT Act from 01.04.2005. The OHA and the Tribunal upheld this decision, concluding that the buses were under the control and supervision of DTC, thus constituting a transfer of the right to use the goods.3. Applicability of Article 366(29A)(d):The court analyzed the legal history and interpretation of Article 366(29A)(d), referencing the Supreme Court's judgment in Bharat Sanchar Nigam Ltd. v. Union of India. The Supreme Court had clarified that for a transaction to constitute a transfer of the right to use goods, the goods must be available and deliverable, and the transferee must have legal rights to use the goods to the exclusion of the transferor.Detailed Analysis:Transfer of the Right to Use Goods:The court examined the agreement between the appellant and DTC, noting that the buses were provided with drivers and were to be used exclusively on routes specified by DTC. The buses' maintenance, insurance, and other responsibilities remained with the appellant, while DTC provided conductors and collected all revenue from passengers. Despite these stipulations, the court found that the possession and control of the buses remained with the appellant, as the buses were not delivered to DTC in a manner that transferred the right to use them exclusively.Imposition of VAT and Penalty:The Tribunal had justified the imposition of VAT and penalty by stating that the buses were under DTC's control and supervision, thus constituting a transfer of the right to use the goods. However, the court disagreed, emphasizing that the buses were not delivered to DTC, and the appellant retained control and possession, including responsibilities for maintenance and insurance. Therefore, the transaction did not qualify as a transfer of the right to use goods under Article 366(29A)(d).Applicability of Article 366(29A)(d):The court referenced the Supreme Court's interpretation in Bharat Sanchar Nigam Ltd., which required that the goods must be available and deliverable, and the transferee must have exclusive legal rights to use the goods. The court found that the appellant retained significant control and responsibilities over the buses, and DTC did not have exclusive rights to use them. Consequently, the transaction did not meet the criteria for a deemed sale under Article 366(29A)(d).Conclusion:The court concluded that the transaction between the appellant and DTC did not constitute a transfer of the right to use goods, and therefore, was not liable to VAT under Section 2(zc)(vi) of the DVAT Act. The imposition of VAT and penalty by the VATO, upheld by the OHA and the Tribunal, was set aside. The substantial question of law was answered in the negative against the Revenue, and the appeal was allowed accordingly.