Transfer of the right to use goods requires exclusive control; workover rig contracts remained service contracts, defeating VAT.

Workover rig contracts were held to be service contracts because the contractor retained possession, control, direction and supervision of the rigs, and the operator had no exclusive legal right to use them. Applying the settled test for transfer of the right to use goods, the absence of exclusive possession and separate consideration for hire meant VAT was not exigible. Even assuming a composite arrangement, the service and sale elements were not separately valued or severable, so the State could not split the transaction and levy VAT on the whole consideration. The VAT demand, appellate orders and Tribunal remand were therefore unsustainable.

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Issues: (i) Whether the workover rig contracts were pure service contracts or involved transfer of the right to use goods so as to attract VAT; (ii) if the contracts were composite, whether the service and sale elements could be severed for VAT assessment.

Issue (i): Whether the workover rig contracts were pure service contracts or involved transfer of the right to use goods so as to attract VAT.

Analysis: The contractual terms showed that the contractor retained possession, control, direction and supervision of the workover rigs throughout the contract. The rigs were deployed by the contractor for rendering workover services, the consideration was linked to day rates for services rendered, and no separate charge for transfer of the right to use the rigs was stipulated. The limited right of the operator to inspect, supervise, or in an exceptional contingency use the equipment did not amount to transfer of exclusive legal right to use. Applying the settled test that transfer of right to use requires available goods, consensus on identity, a legal right in the transferee, and exclusion of the transferor during the period of transfer, the essential attributes of such transfer were absent.

Conclusion: The contracts did not involve transfer of the right to use goods and were pure service contracts, so VAT was not exigible.

Issue (ii): If the contracts were composite, whether the service and sale elements could be severed for VAT assessment.

Analysis: Even on the assumption that the contracts had both service and goods elements, the agreement did not provide bifurcated consideration for hire of rigs and services, and the transaction was not structured as a severable composite contract. The constitutional fiction permitting severance applies only where the sale element is distinctly discernible and separable. In the absence of such distinct valuation, the State could not artificially split the transaction and levy VAT on the whole consideration.

Conclusion: The contracts were not severable for VAT purposes and could not be assessed as composite sales transactions.

Final Conclusion: The impugned VAT demand, related appellate orders, and the Tribunal's remand could not be sustained, and the petition succeeded.

Ratio Decidendi: A contract for use of equipment remains a service contract where the contractor retains effective control and exclusive possession of the equipment, and VAT cannot be imposed unless the transferee acquires a legal and exclusive right to use the goods with a separable sale element.

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