Background:

M/s. K.P. Mozika and other parties entered into agreements to provide motor vehicles with crew to ONGC and IOCL for their operations and transportation of petroleum products. The tax authorities and the Gauhati High Court had initially held that these transactions amounted to a "transfer of the right to use goods" and were therefore taxable under sales tax/VAT laws. The appellants (M/s. K.P. Mozika and others) challenged this in the Supreme Court.

Issues:

1. Whether contracts for hiring various motor vehicles (cranes, trucks, tankers, etc.) by companies like ONGC and IOCL constituted a "transfer of the right to use goods," making them subject to sales tax or Value Added Tax (VAT) under the Assam General Sales Tax Act, 1993, and the Assam Value Added Tax Act, 2003, or whether they were purely service transactions, attracting service tax instead?

2. What criteria should be applied to determine whether "effective control and possession" of the goods is transferred to the recipient, which is a crucial factor in distinguishing a "transfer of the right to use goods" from a pure service contract?

Observations:

The Court made the following observations:

• 1. No transfer of legal right to use- ONGC was only given permissive use; not the legal right or exclusive possession of the vehicles.
• 2. Contractors retained full control- Including drivers, fuel, maintenance, insurance, and operational decisions.
• 3. Panch-Ratna test not fulfilled- Especially the requirements of exclusive control and legal right to use by the hirer.
• 4. The arrangement did not qualify as a ‘transfer of right to use goods’ under Article 366(29A)(d).
• 5. The transaction is a service contract, subject to service tax, not VAT or sales tax.

Decision:

The Supreme Court allowed the appeal, setting aside the judgments of the lower authorities that treated the contracts as “deemed sales” under the Assam General Sales Tax Act and VAT Act.

• • Determined that the contracts did not constitute a "transfer of the right to use goods" as defined under the relevant tax laws.
• • Consequently, these transactions were not subject to the Sales Tax Act or the VAT Act.
• • The Court clarified that these were service contracts, potentially attracting service tax instead, and granted liberty to the Revenue to initiate proceedings for service tax recovery if applicable.

Why this case matters?

This judgment is a landmark decision that provides crucial clarity on the distinction between "sale" and "service" for taxation purposes, particularly in the context of hiring contracts. It emphasizes that for a transaction to be considered a "transfer of the right to use goods" (and thus a deemed sale), the effective control and dominion over the goods must substantially shift to the user/transferee. If the owner/contractor retains significant control, maintenance, and liability, the transaction is more likely to be classified as a service. This ruling helps in avoiding dual taxation and ensures consistent application of tax laws based on the true nature of the contract.