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In a recent ruling, the Supreme Court clarified the distinction between the transfer of the right to use and a mere license in the context of a tax dispute, while allowing appeals against the imposition of sales tax on contracts for the use of vehicles by the public sector ONGC (Oil and Natural Gas Corporation).

A bench of Justices Abhay S Oka and Sanjay Karol emphasized that not every instance where the owner permits another person to use goods constitutes a transfer of the right to use those goods. The court highlighted that it could simply be a license to use the goods without involving the transfer of the right to use.

The appeals were filed by various entities challenging their liability to pay tax under the Assam General Sales Tax Act, 1993, and the Assam Value Added Tax Act, 2003, for contracts with ONGC to provide different categories of motor vehicles, including trucks, trailers, tankers, buses, scrapping winch chassis, and cranes.

The court scrutinized the definition of “sale” under the Sales Tax Act, which incorporates the requirement of the transfer of property in goods. It also referred to Clause 29A of Article 366 of the Constitution, which introduces the concept of a “deemed sale.” The court noted that the condition for the applicability of the sale of goods is the transfer of property, but under Clause 29A(d), the focus is on the transfer of the right to use goods for consideration.

To support its interpretation, the court referred to the concurring view in the case of ‘Bharat Sanchar Nigam Limited Vs Union of India’ (2006), which established specific attributes for a transaction to be considered a transfer of the right to use goods.

Examining the contracts in question, the court concluded that the finding of the high court, which suggested a transfer of the right to use the vehicles, was incorrect. It highlighted that the contractor retained substantial control over the vehicles, including options for replacement and responsibilities for maintenance and fuel costs. Therefore, the court ruled that there was no transfer of the right to use the vehicles, and the transactions should be considered as rendering services, subject to service tax.

The Supreme Court allowed the appeals by the assessees and granted the Union government the liberty to initiate proceedings for the recovery of service tax, if applicable.

CASE NAME:    M/s K P Mozika Vs Oil and Natural Gas Corporation Ltd & Ors


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