TaxTMI 
TaxTMI 
2018 (1) TMI 614
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....erefore, without jurisdiction, bad and illegal. Alternatively, the petitioners seek a declaration that the levy of tax under the GVAT Act on the workover rigs imported qua the workover service contracts is in any case violating Article 286 of the Constitution of India read with section 5(2) of the Central Sales Tax Act, 1956. Alternatively, the petitioners seek a direction to the Union of India to transfer the amount of service tax collected on the workover service contracts towards the alleged VAT liability on the transactions as determined by the authorities of the State of Gujarat. 2. The facts as averred in the petition are that the petitioners are engaged in providing services such as, gas compression and workover services to companies such as, Oil and Natural Gas Corporation Ltd. (hereinafter referred to as "ONGC"), who are engaged in exploration of oil and natural gas. The petitioners are duly registered under the VAT Act as well as under the Finance Act, 1994 (hereinafter referred to as "the Finance Act") for the purpose of discharging service tax liability. The petitioners entered into contracts with customers for provision of services. Insofar as the workover services ....
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....e case of the petitioners that the the contracts are, in substance, contracts for carrying out workover operations using workover rigs imported specifically for the purpose of the contracts from outside the country. The petitioners considered such contracts to be contracts for provision of service and duly discharged service tax liability at the rate of 12.36% under the Finance Act on the consideration received from the clients. 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. 5. A show cause notice dated 16.1.2015 came to be issued to the petitioners by the Assistant Commissioner of Commercial Tax, requiring the petitioners to show cause as to why tax should not be imposed under the GVAT Act on the gas compression contracts as well as the workover service contracts on the ground that they involved transfer of right to use goods and therefore, they were deemed sales under the GVAT Act. 6. In response thereto, the petitioners submitted a detailed written reply on 10.3.2015 contending that the gas compression as we....
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....unal on the ground that the situs of deemed sale by way of transfer of right to use goods will be in the State in which the agreement is executed. Being aggrieved, the petitioners have approached this court, seeking the reliefs noted hereinabove. 10. Mr. Uchit Sheth, learned advocate for the petitioners invited the attention of the court to various clauses of the agreements, reference to which shall be made at a later stage. It was submitted that the contracts entered into by the Petitioners with clients such as ONGC is for performance of various activities and operations using workover rig which is owned by the petitioners. There is no transfer of effective possession and control by the petitioners in favour of clients such as ONGC and therefore, the contracts do not involve any deemed sales by way of transfer of right to use goods under section 2(23) of the GVAT Act. Referring to various clauses of the agreement, it was, inter alia, submitted that in view of clauses 5.4 and 5.2.1 of the agreement, ONGC's role was restricted to supervision of the entire activities, whereas the contractor's representative had complete charge of the contractor's personnel who were engaged in the ....
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....ate of Andhra Pradesh v. Rashtriya Ispat Nigam Ltd., 126 STC 114 (SC), for the proposition that deemed sale by way of transfer of right to use goods required transfer of effective possession and control of the goods. 10.2 Next, it was contended that the workover contracts entered into by the petitioners are composite indivisible contracts and therefore they cannot be taxed under the GVAT Act. Reliance was placed upon the decision of the Supreme Court in the case of Bharat Sanchar Nigam Ltd. v. Union of India, 145 STC 91 (SC), wherein the court has held that even after the 46th Constitutional Amendment only three different kinds of composite transactions could be severed by fiction - works contract, hire-purchase contract and catering contract. 10.3 Reliance was also placed upon the decision of the Madras High Court in the case of Aban Loyd Chiles Offshore Ltd. v. State of Tamil Nadu, 53 VST 89 (Madras), wherein in relation to a contract for drilling operations for the ONGC for using drilling rigs, the court held that the nature of work entrusted to the contractor was only to render services in drilling operations with its own personnel and the effective control of the rigs re....
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.... of right to use goods requires transfer of effective control and possession of the goods. (b) No composite contracts other than works contracts, hire purchase contracts and catering contracts can be mutilated and split. (c) If employees for operation of equipment are provided by the dealer and maintenance/fuel expenses are also borne by the dealer then there is no transfer of right to use goods. (d) If the contract is for achievement of some work then it is a service contract and not a contract for transfer of right to use goods. (e) If contract involves complex services then it cannot be taxed as involving transfer of right to use goods. (f) The fact that a particular equipment is used exclusively for one customer at a particular period of time does not ipso facto mean that the right to use such equipment is transferred. (g) Nature of transactions need to be determined on the basis of substance of the contract and not title/nomenclature. 10.6 It was submitted that if the above principles are applied to the facts of the present case, then the conclusion is inescapable that there is no transfer of right to use workover rigs b....
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....uire importation of workover rigs, which are to be used by the petitioners in the execution of the contracts. Even the names of the vendors from whom the petitioners are required to import such equipment are mentioned in the bid documents and contracts. In fact, the ONGC gives essentiality certificate on the basis of which rigs are imported without payment of customs duty. It is not open for the petitioners to divert the rigs for any other use. Thus, assuming without admitting that the contracts involve deemed sales by way of transfer of right to use goods, even then, such deemed sales are in the course of import and therefore not taxable by virtue of Article 286 of the Constitution of India read with section 5(2) of the Central Act and section 4 of the GVAT Act. 10.9 Another alternative submission raised by the learned advocate for the petitioners was that if at all the workover contracts are considered to be involving deemed sales by way of transfer of right to use goods, then retention of service tax on such consideration by the second respondent is wholly without jurisdiction. Such double taxation is also arbitrary and violative of Article 14 of the Constitution of India. Th....
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....ditions of contract at Appendix-7 to the agreement, which provides for the ONGC's obligations as well as clause 15 which provides that the contractor shall mobilize the rigs as specified in the contract, within the stipulated mobilization period/deployment schedule and the ONGC shall not allow substitution of the rig under any circumstances. It was submitted that thus, the parties have agreed that the officials of the ONGC are also empowered to ensure proper utilization of the rigs that are being installed by the petitioners. It was contended that the terms and conditions of the contract clearly show that the effective control vests in the ONGC. It was submitted that the opening part of the contract clearly indicates that the intention of the parties was to enter into a contract of hiring. It was submitted that the petitioner was required to operate the rigs according to the advice, guidance, suggestions and instructions of the ONGC which also shows that the effective control was of the ONGC. Thus, on an overall view of the clauses of the contract, it is evident that there has been a transfer of the right to use the workover rigs. 11.1 Next, it was submitted that the relevant cl....
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....f Goods by Road. In terms of the Finance Act, 1994, "taxable service" means any service provided or to be provided to any person, by any other person in relation to mining of mineral, oil or gas. It was submitted that considering the scope of work as per the contract entered into between the ONGC and the petitioners, the present case falls within the ambit of "taxable service" in relation to mining of mineral, oil or gas. Dealing with the alternative submissions made on behalf of the petitioners regarding transfer of service tax to the State of Gujarat for the GVAT liability, it was submitted that the service tax is charged on the mining service provided by the petitioners. The petitioners have obtained registration under the service tax for providing such services. When mining service is taxable, the question of transfer of service tax collected as against the State Value Added Tax liability does not arise. It was submitted that the service tax is a central tax levied and collected by the Central Government and there is no question of transfer of the tax so collected to the State Government. 13. In rejoinder, Mr. Uchit Sheth, learned advocate for the petitioners submitted that ....
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.... 1.25 defines "contractor's personnel" to mean the personnel to be provided by the contractor from time to time to conduct workover and related auxiliary operations and to provide services as per the contract and/or other contractor's personnel (arranged by the contractor) performing any function relating to the contract. "Duration of the contract" is set out in clause 3.0 of the agreement. Clause 5.0 sets out "Duties and Power/Authority" and reads as under: "5.0 DUTIES AND POWER/AUTHORITY: 5.1 The duties and authorities of the ONGC's site representative are to act on behalf of the ONGC for: (i) Overall supervision, co-ordination and Project Management at site (ii) Proper utilisation of equipment and services. (iii) Monitoring of performance and progress (iv) Commenting/countersigning on reports made by the CONTRACTOR's representative at site in respect of works, receipts, consumption etc. after satisfying himself with the facts of the respective cases. (v) He shall have the authority, but not obligation at all times and any time to inspect/test/examine/verify and equipment machinery, instruments, tools, materials, pers....
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.... in connection with the contract. ONGC will have no liability on this account. It, however, provides that the contractor shall not be required to take insurance cover for their equipment, tools when they are in the custody of ONGC. 19. Appendix-1 to the contract agreement provides for "Scope of Work". Clause 1.0 thereof bears the heading "Scope of Work". Clause 1.1 thereunder, inter alia, provides that the contractor shall provide complete workover rig along with associated rig equipment and personnel, all conforming to the indicated specifications and maintain and operate the rig, so as to carry out workover operations at all such locations and up to defined depths as identified by ONGC from time to time. It further provides that the contractor shall ensure the aspects enumerated thereunder. Clause 1.3 provides for "Equipment and services to be provided by the contractor" and says that the contractor shall provide complete workover rig with trucking equipment along with personnel, equipment, material and supplies required to perform the workover jobs and other services as set forth therein. The workover rig and the equipments shall conform to the technical specifications as per....
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....ow and also described in price schedule. 4.1 OPERATING DAY RATE R-I : ONGC will pay contractor an operating rate R-I for actual number of days required to complete a particular workover operation as per the given programme of work on the basis of rates quoted by the contractor and agreed by ONGC. Charges on this head will include all activities intimated after the rig building is complete and first operation in the well has been started to the last operation carried out at the present site before the release of rig excluding those indicated in succeeding paras on stand by rate R-II and repair rate R-III. 4.2 STANDBY DAY RATE R-II : ONGC shall pay contractor as standby rate R-II payable for following operations. [a] Interruption/delay in moving rig due to ONGC having failed to give prior notice and proper access to next location. [b] Pressure testing of well head, choke manifold; BOP stack, kill and choke line, etc. as per instructions of ONGC representative. [c] Logging and perforation of hole. [d] Repairing damage to contractor's equipment caused by actions of ONGC/ONGC's contractor other than workover contrac....
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....trol, direction and supervision of operations being carried out under this Agreement except when and to the extent that the Operator assumes control and supervision of operation. (c) Contractor shall have complete responsibility regarding the safety of operations of all systems and all personnel on board the workover Unit. The extent of Contractor's responsibility shall include but not limited to making final decision regarding:- (1) Evaluation of inspection and survey conducted by Operator of the well site to determine whether or not the Workover Unit can be positioned at the site of operations considering the conditions at the site or maintained in position the same during the operations. (2) Whether or not the Workover Unit may be safely rigged up / down on a location. (3) Subject to clause 21 of Appendix-7, Well Control Measures, Actions and Procedures affecting the containment of existing or potential escape of pressures which could lead to blowouts, cratering, or similar catastrophe." 25. Clause 25 provides for "Responsibility for Loss of or Damage to the Equipment or the Hole". Clause 25.1 relates to "Loss of Contractor's Workover Unit"....
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....5.0 of the agreement provides for the duties and authorities of the ONGC's site representative to act on behalf of the ONGC, clause (v) thereof specifically states that the overall responsibility of quality of work shall rest solely with the contractor. Clause 5.2.1 of the agreement provides that the contractor's representative shall have all the powers requisite for the performance of the work. Thus, 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. Clause 7.0 which relates to remuneration and terms of payment, is an important clause to discern the intention of the parties as to whether they intended the contract to be one of hiring of rigs, in other words, to transfer the right to use the rigs or whether they intended it to be a contract of service only. Clause 7.1 provides that the Corporation shall pay to the contractor for the services to be provided by the contractor as per the scope of work and provisions of contract as per schedule of rates at Appendix-10. The schedule of rates at Appendix-10 shows tha....
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....ined. The work contemplated therein shall meet the approval of operator and be subject to the general rights of directions and inspection. Neither contractor's employees nor employees of its sub-contractors, shall be considered employees of operator. Clause (b) thereof provides that the contractor shall at all times, have full responsibility for control, direction and supervision of operations being carried out under the agreement except when and to the extent that the operator assumes control and supervision of operation. 29. Clause 26.2, therefore, also gives an indication that in the ordinary course, the ONGC does not have the right to use the workover unit and the contractor's equipment and personnel, except in the exceptional circumstances stated therein. 30. As noted earlier, clause 3.0 of the Special Conditions of Contract, which bears the heading "Payments to Contractor", provides for the rates for the work performed etc. Clause 4.0 thereof provides for "day rates" and categorizes the rate payable to the contract per day in three categories. On operating day rate R-I, standby day rate R-II and break-down and break down day rate R-III. Thus, the rates for payment to th....
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....tion is a composite contract of sale of goods and services, clearly, it is not permissible for the State Legislature by applying DVAT Act to tax composite contracts comprising of both goods and services. Not only the contracts cannot be artificially split up so as to enable the sale element to be taxed, further, the States cannot treat the contract as only a contract of sale of goods and tax the whole value of the transaction as a sale of goods. Since the parties have not intended the contract to be mutilated/severable inasmuch as no different values are specified in the subject contract towards goods value separately and the value of services separately, it is not permissible by the DVAT Act to impose sales tax on the whole transaction value because that would amount to the State to entrench upon the Union List and tax services by including the cost of such services in the value of the goods. Thus, the contract in question being a composite contract is to be treated as a contract for services and no sales tax can be imposed on the contracts in question. The above decision would be squarely applicable to the present case, inasmuch as the parties have not intended the contract to....
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.... ship is hired for a fixed period of time. In a demise or bare boat charter, the charterer takes over complete control of the ship for a specific purpose or period of time. The difference between a voyage charter and time charter on the one hand and a demise/bare boat charter on the other is that under the first two categories, the ship remains under the control of the owner, as to manning and navigation. In the case of demise or bare boat charter, the control shifts to the charterer. 46. In the case on hand, the parties to the contract have used the expression charter hire, only because of the fact that they were dealing with offshore drilling rigs. Articles 3.0, 4.0 and 9.2 of the agreement make it clear that the agreement between the parties does not fall under the category of a charter similar to a demise or bare boat charter. The terms of the agreement makes it clear that the entire control with regard to manning, operating and navigating was retained by the petitioner herein. Once this is clear, it follows as a corollary that there was no transfer of the right to use." Thus, the mere use of the words charter hire in relation to workover rigs would not change the n....
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....uch supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;" 41. Sub-clause (a) covers a situation where the consensual element is lacking. This normally takes place in an involuntary sale. Sub-clause (b) covers cases relating to works contracts. This was the particular fact situation which the Court was faced with in Gannon Dunkerley, [1958] 9 STC 353 (SC), and which the Court had held was not a sale. The effect in law of a transfer of property in goods involved in the execution of the works contract was by this amendment deemed to be a sale. To that extent the decision in Gannon Dunkerley was directly overcome. Sub-clause (c) deals with hire-purchase where the title to the goods is not transferred. Yet by fiction of law, it is treated as a sale. Similarly the title to the goods under sub-clause (d) remains with the transferor who only transfers the right to use the goods to the purchaser. In other words, c....
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....ient to the doctor or lawyer for the documents in both cases. 45. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366(29-A) continues to be: Did the parties have in mind or intend separate rights arising out of the sale of goods? If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is "the substance of the contract". We will, for the want of a better phrase, call this the dominant nature test." "49. We agree. After the Forty-six....
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....ing of sub-clause (d) of clause (29-A) of Article 366. What is noteworthy is that in both the cases there were goods in existence which were delivered to the contractors for their use. In one case there was no intention to transfer the right to use while in the other there was." "97. To constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes: (a) there must be goods available for delivery; (b) there must be a consensus ad idem as to the identity of the goods; (c) the transferee should have a legal right to use the goods-consequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee; (d) for the period during which the transferee has such legal right, it has to be the exclusion to the transferor- this is the necessary concomitant of the plain language of the statute viz. a "transfer of the right to use" and not merely a licence to use the goods; (e) having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the sam....
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....ated and subjected to value added tax. 35. At this juncture, reference may also be made to the following findings recorded in the concurring decision in Bharat Sanchar Nigam Limited (supra): "97. The entire infrastructure/instruments/appliances and exchange are in the physical control and possession of the petitioner at all times and there is neither any physical transfer of such goods nor any transfer of right to use such equipment or apparatuses. 98. To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes: [a] There must be goods available for delivery; [b] There must be a consensus ad idem as to the identity of the goods; [c] The transferee should have a legal right to use the goods - consequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee; [d] For the period during which the transferee has such legal right, it has to be the exclusion to the transferor - this is the necessary concomitant of the plain language of the statute - viz., a "transfer of the right to use" and n....
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....f the petitioners. Under the circumstances, the transaction in question does not meet with the attributes laid down by the Supreme Court in the above referred decision. Consequently, it cannot be said that the transaction is a transaction for transfer of right to use goods. 37. In State of Andhra Pradesh v. Rashtriya Ispat Nigam Ltd. (supra), the respondent allotted different works to contractors and supplied sophisticated machinery to the contractors for being used in the execution of the contracted works and received charges for the same. The court, on a consideration of the agreement of the respondent with the contractors found that the effective control of the machinery, even while the machinery was in use, was with the respondent: the contractors were not free to make use of the machinery for other works or move the machinery out during the period the machinery was in use, and held that the transaction did not involve the transfer of right to use machinery in favour of the contractors and the hire charges could not be brought to tax under section 5-E of the Andhra Pradesh General Sales Tax Act, 1957. In the present case, the petitioners stand on a much stronger footing. The....
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....as been held thus: "7 In the present case, from the facts noted earlier, it is clear that the goods, i.e., computers and terminals were always in possession of the respondents. They were never delivered or handed over to the ONGC. It may be that as per the requirement of ONGC, fixed time was assigned to them and during that fixed time of the day, staff members of ONGC would come to the office of the respondents to get their work done but during all that period, computers would be operated by the employees of the respondents and not by the employees of the ONGC. Merely because a person agrees to provide service to a particular customer during a particular period of time of day to the exclusion of all other customers for the purpose of convenience, it does not mean that goods have been actually delivered to that particular customer to the exclusion of not only other customers but also to the exclusion of owner himself. Nature of the contract and the transaction between the respondents and the ONGC was nothing more than service contract whereby certain services were provided by the respondents to the ONGC. There is nothing to show that the constructive possession of ....
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....eing workover rigs, always remains with the petitioners who use the same for providing services under the contract. At no point of time are the goods delivered to the ONGC nor does the ONGC ever use the same to the exclusion of the petitioners. The above decision therefore, has no applicability to the facts of the present case. 42. Various other decisions as enumerated hereinabove, laying down similar propositions of law, have been relied upon by the learned counsel for the petitioners, however, with a view to avoid repetition the court does not deem it necessary to refer to all of them in detail. 43. In the light of the above discussion, this court is of the view that 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. 44. The upshot of the above discussion is that the contract entered into between the petitioner and the ONGC for workover operations of oil wel....