VAT not applicable on transfer of right to use of goods if effective possession and control of the goods are not transferred

Dear Professional Colleague,

VAT not applicable on transfer of right to use of goods if effective possession and control of the goods are not transferred

We are sharing with you an important judgment of the Hon’ble High Court of Delhi, in the case of Hari Durga Travels Vs. Commissioner of Trade & Taxes, Delhi [2015 58 taxmann.com 149 (Delhi)] on the following issue:

Issue:

Whether the Agreement of giving on hire two Deluxe buses for being run on the routes as per requirement of the person to whom they are hired, constitutes ‘transfer of right to use of goods’ so as to be liable to VAT under Section 2(1)(zc)(vi) of Delhi Value Added Tax Act, 2004?

Facts:

Hari Durga Travels (“the Appellant”) was engaged in business of providing buses on rental basis. The Appellant entered into an Agreement with Delhi Transport Corporation (“DTC”) in January, 2005 for providing two Volvo buses on rental basis as per the terms and conditions mutually settled.

In terms of the Agreement, the Appellant was obligated to keep the bus in neat, clean and presentable condition and for purposes of upkeep, make the necessary arrangements with service centres/ dealers/ repair shops, etc., on the routes. Further, the Agreement stipulated that the Appellant shall be obliged to keep DTC indemnified against all claims arising out of accidental damage or loss caused during the operation to third party or to the vehicles and also remains responsible for payment of fines, penalties for violation of traffic rules etc. Furthermore, the Appellant was not entitled to “withdraw the bus from operation without prior written consent” of DTC nor can it use these vehicles “for any other purpose at any time”, nor “transfer or otherwise alienate (except with prior written permission of DTC) vehicles” during the period of Agreement.

The Appellant received certain amount from DTC on account of hire charges for running its buses under said Agreement. The Assessing Authority treated above transaction as Deemed Sale on account of transfer of right to use goods and imposed VAT on receipt amount under the provisions of the Delhi Value Added Tax Act, 2004 (“the DVAT Act”) and  raised a demand of Rs. 12,96,749/- with imposition of interest and penalty.

Later on, both the Objection Hearing Authority and the Ld. Tribunal upheld the Order passed by the Assessing Authority and held that the Agreement in question had resulted in transfer of the effective control and possession of the two buses to DTC and is covered under ‘transfer of right to use goods’ under Article 366(29A)(d) of the Constitution of India.

Being aggrieved, the Appellant filed an appeal before the Hon’ble High Court of Delhi.

Held:

The Hon’ble High Court of Delhi relying upon the following case laws:

a. Bharat Sanchar Nigam Ltd. Vs. Union of India [(2006) 3 STT 245 (SC)];

b. State of Andhra Pradesh Vs. Rashtriya Ispat Nigam Ltd. [(2002) 3 SCC 214];

c. Commissioner, VAT Trade & Taxes Department Vs. International Travel House [2009 (9) TMI 879 - DELHI HIGH COURT]

Held that:

i. The various terms of the Agreement make it vividly clear that the possession has always remained with the Appellant itself;

ii. Undoubtedly, it is the obligation of the Appellant to make the vehicles available, with their respective drivers, for being deployed on routes, and as per schedule, specified by DTC. However, the registration certificate and the permits continue to be in the control and possession of the Appellant who continued to be responsible for all repairs etc.;

iii. The mere facts that DTC has control over ticket collections or absolutely collects all the revenues or bus maintenance and repair is subject to its prior approval, are ipso facto not decisive either by themselves or cumulatively in concluding that there was a transfer of the right to use the buses;

iv. Goods should be ultimately delivered for the transaction to constitute a ‘Sale’ within the extended meaning defined by Article 366(29A) of the Constitution of India and such transaction by itself would not be transfer of the right to use if effective control is retained by the owner.

Thus, the Hon’ble High Court held that the transaction could not be treated as “Deemed sale of goods” under Section 2(1)(zc)(vi) of DVAT Act.

Hope the information will assist you in your Professional endeavours. In case of any query/ information, please do not hesitate to write back to us.

Thanks & Best Regards,
Bimal Jain
FCA, FCS, LLB, B.Com (Hons)

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Readers are advised to consult the professional for understanding applicability of this judgement in the respective scenarios. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. No part of this document should be distributed or copied (except for personal, non-commercial use) without our written permission.