2021 (5) TMI 34 - HC - VAT and Sales Tax

High Court prohibits VAT on service contract machinery transfer, Supreme Court affirms.

M/s. John Energy Limited, Versus The State of Tripura, The Commissioner of Taxes, Government of Tripura, The Superintendent of Taxes, Oil and Natural Gas Corporation Ltd.,

The High Court ruled against the Tripura Value Added Tax department, prohibiting the imposition of VAT on transactions involving the transfer of the right ... Levy of VAT - transfer of right to use the machinery and equipments - Award of contract by ONGC under a work order - deduction of TDS on such transaction - HELD THAT:- It is an undisputed position that identical situation had come up before this Court and by a judgment in case of QUIPPO OIL AND GAS INFRASTRUCTURE LIMITED VERSUS THE STATE OF TRIPURA AND OTHERS [2014 (11) TMI 1070 - TRIPURA HIGH COURT] the Court had held that the transaction in question is not exigible to Value Added Tax. This was on the premise that according to the Court the contract comprised mainly of hiring of services and a very small element of transfer of right to use goods was involved. It was held that the intention of the parties was to treat the contract as a contract for hiring of services and it was not permissible to divide the contract into two separate parts namely of engagement of services and transfer of right to use the goods. The State of Tripura had challenged this judgment before the Supreme Court and the SLP was dismissed by an order dated 01.02.2017. Thus, this judgment has achieved finality and the issues so far as this Court is concerned must rest here. It is declared that the respondents shall not be competent to levy Value Added Tax on the transactions between the petitioner and ONGC which are in question. Since this Court had prevented the respondents from levying any such tax pending the petition, there shall be no question of refund - Petition allowed. Issues involved:- Whether Value Added Tax can be levied on transactions involving the transfer of right to use machinery and equipment during the execution of a contract for services.- Whether the judgment in the case of Quippo Oil and Gas Infrastructure Ltd. v. State of Tripura provides precedent for determining the taxability of such transactions.- Finality of the judgment in light of the Supreme Court's dismissal of the Special Leave Petition (SLP) challenging the High Court's decision.Analysis:Issue 1:The primary issue in this case revolves around the imposition of Value Added Tax (VAT) by the Tripura Value Added Tax department on transactions where there is a purported transfer of the right to use machinery and equipment during the execution of a service contract. The petitioner, a company engaged in providing drilling and work over rig services to ONGC, contests the imposition of VAT on the premise that the contract mainly involves the hiring of services with a minor element of the transfer of the right to use goods. The petitioner argues that the predominant nature of the contract is for services, and it is not permissible to separate the contract into distinct parts of service engagement and goods usage.Issue 2:The judgment in the case of Quippo Oil and Gas Infrastructure Ltd. v. State of Tripura serves as a significant precedent in determining the taxability of transactions similar to the one in question. The court in the Quippo case held that contracts primarily for hiring services, with a minimal element of goods usage, are not subject to Value Added Tax. The court emphasized that the intention of the parties to treat the contract as a service agreement prevails, and attempts to divide the contract into service and goods components are impractical when services constitute a substantial portion of the agreement.Issue 3:The finality of the High Court's judgment is established by the dismissal of the Special Leave Petition (SLP) challenging the decision before the Supreme Court. The Supreme Court's rejection of the SLP on 01.02.2017 confirms the validity and conclusiveness of the High Court's ruling, thereby settling the issues concerning the imposition of Value Added Tax on transactions between the petitioner and ONGC.In conclusion, the High Court's decision prohibits the Tripura Value Added Tax department from levying VAT on transactions involving the transfer of the right to use machinery and equipment during service contracts. The judgment underscores the importance of considering the dominant nature of the contract as a service agreement and upholds the principle that contracts primarily for hiring services are not subject to Value Added Tax. The finality of the judgment, affirmed by the Supreme Court's dismissal of the SLP, solidifies the legal position established by the High Court, providing clarity on the taxability of such transactions.