2018 (1) TMI 614 - HC - VAT and Sales Tax

Court rules workover service contracts not taxable under GVAT Act, exempt under constitutional provisions

Deep Industries Ltd And 1 Versus State of Gujarat And 1

The court allowed the petition, quashing the impugned order and holding that the workover service contracts were pure service contracts, not subject to ... Levy of service tax or VAT - workover service contracts entered into by the petitioners with clients - GVAT Act - Article 286 of the Constitution of India read with section 5(2) of the Central Sales Tax Act, 1956 - While the petitioners duly filed returns under the GVAT Act, they did not admit any liability of tax under the GVAT Act since according to the petitioners the contracts do not involve any sale/deemed sale of goods. Whether the contract entered into between the petitioners and the ONGC for workover operations on oil wells of the ONGC is (a) a purely service contract, or (b) a composite contract involving both, an element of service as well as transfer of right to use goods? Held that: - while the overall supervision of the project is carried out by the representative of the ONGC, the actual work is executed by the contractor through his representative and all the contractor’s personnel are under his charge - the court has held that all the sub-clauses of Article 366(29-A) of the Constitution serve to bring transactions where one or more of the essential ingredients of a sale as defined in the State of Goods Act, 1930 are absent, within the ambit of purchase and sales for the purposes of levy of sales tax. The amendment especially allows specific composite contracts viz., works contract [sub-clause (b)]; hire-purchase contracts [subclause (c)], catering contracts [sub-clause (e)] by legal fiction to be divisible contracts where the sale element could be isolated and be subjected to sales tax. The court has observed that of all the different kinds of composite transactions, the drafters of the Forty-sixth Amendment chose three specific situations, a works contract, a hire-purchase contract and a catering contract to bring them within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been constitutionally permitted in sub-clauses (b) and (f) of clause (29-A) of Article 366, there is no other service which has been permitted to be so split. The contract between the petitioners and the ONGC does not involve any transfer of the right to use goods and resultantly there is no deemed sale attracting the levy of value added tax on such transaction. The contention of the petitioner that the transaction is only for providing the service of workover operation and nothing more, therefore, deserves to be accepted. The contract entered into between the petitioner and the ONGC for workover operations of oil wells of ONGC is a pure contract of services to the ONGC. The impugned order passed by the Tribunal which holds that the contract dated 8.7.2008 entered into between the petitioner and the ONGC is a composite contract involving both the element of deemed sale by way of transfer of right to use goods and the element of providing services to the ONGC, being contrary to the intention of the parties as provided in the agreement to contract, cannot be sustained. The Tribunal after holding the contract to be a composite one, involving an element of service as well as an element of transfer of the right to use the goods has remanded the matter to the first appellate authority to recalculate the tax liability with consequential effect on interest and penalty - petition allowed. Issues Involved:1. Legislative competence of the State of Gujarat to levy tax under the GVAT Act on workover service contracts.2. Whether the workover service contracts involve a transfer of right to use goods, constituting a deemed sale under the GVAT Act.3. Applicability of Article 286 of the Constitution of India and Section 5(2) of the Central Sales Tax Act, 1956.4. Double taxation and the request for transfer of service tax collected to the State of Gujarat.5. Imposition of tax under the GVAT Act on rigs used for operations outside the State of Gujarat.Issue-wise Detailed Analysis:1. Legislative Competence of the State of Gujarat to Levy Tax under the GVAT Act on Workover Service Contracts:The petitioners challenged the levy of tax under the GVAT Act on workover service contracts, arguing that such contracts are beyond the legislative competence of the State of Gujarat. The court examined whether the contracts involved a transfer of right to use goods, which would fall within the purview of the GVAT Act. The court concluded that the contracts were pure service contracts and did not involve any transfer of right to use goods, thus falling outside the legislative competence of the State of Gujarat to levy tax under the GVAT Act.2. Whether the Workover Service Contracts Involve a Transfer of Right to Use Goods, Constituting a Deemed Sale under the GVAT Act:The court analyzed the nature of the workover service contracts, which included specific clauses indicating that the petitioners retained control and possession of the workover rigs at all times. The contracts required the petitioners to provide services using their own personnel and equipment, with no transfer of effective control or possession to the clients, such as ONGC. The court referred to the principles laid down in various judicial precedents, including the Supreme Court's decision in Bharat Sanchar Nigam Limited v. Union of India, and concluded that the contracts did not involve a transfer of right to use goods, and hence, did not constitute a deemed sale under the GVAT Act.3. Applicability of Article 286 of the Constitution of India and Section 5(2) of the Central Sales Tax Act, 1956:The petitioners argued that even if the contracts were deemed to involve a transfer of right to use goods, such deemed sales would be in the course of imports and hence, not taxable under Article 286 of the Constitution of India read with Section 5(2) of the Central Sales Tax Act, 1956. The court noted that the workover rigs were specifically imported for the contracts and the petitioners were not allowed to use them for any other purpose. The court held that the transactions were in the course of imports and thus, not subject to tax under the GVAT Act.4. Double Taxation and the Request for Transfer of Service Tax Collected to the State of Gujarat:The petitioners contended that if the contracts were considered to involve deemed sales, the retention of service tax on such consideration by the second respondent (Union of India) was without jurisdiction, leading to double taxation. The court did not delve into the merits of this argument, as it had already concluded that the contracts were pure service contracts and not subject to tax under the GVAT Act.5. Imposition of Tax under the GVAT Act on Rigs Used for Operations Outside the State of Gujarat:The court observed that the assessing authority had imposed tax under the GVAT Act even for workover operations carried out outside the State of Gujarat. The court held that the imposition of tax on rigs used for operations outside the state was without jurisdiction, as the rigs never entered the State of Gujarat, and thus, there was no question of tax liability under the GVAT Act.Conclusion:The court allowed the petition, quashing the impugned order dated 25.1.2016 passed by the Gujarat Value Added Tax Tribunal and the orders of the authorities confirmed by the Tribunal. The court held that the workover service contracts were pure service contracts, not involving any transfer of right to use goods, and thus, not subject to tax under the GVAT Act. The court also noted that the contracts were in the course of imports and not taxable under Article 286 of the Constitution of India read with Section 5(2) of the Central Sales Tax Act, 1956. Consequently, the court set aside the orders imposing tax, interest, and penalty under the GVAT Act.