Hiring cranes with effective control retained by the owner constitutes service, not deemed sale under MVAT.

The Appellant, a proprietary concern providing cranes on hire, entered into agreements with Hindustan Construction Company Ltd. dated 18 January 2005 and Era Constructions (India) Ltd. dated 31 July 2004 for providing cranes at fixed monthly hire charges of ₹3,10,000 and ₹2,50,000, respectively.

The agreements provided for specified hire periods, fixed working hours, mobilisation and demobilisation charges, insurance by the Appellant, and replacement of defective equipment or operators at the hirers’ request.

The revenue treated the hire charges as a deemed sale involving transfer of the right to use goods under Section 2(24)(b)(iv) of the Maharashtra Value Added Tax Act, 2002 (“MVAT Act”).

The Deputy Commissioner accepted the revenue’s position, and the Maharashtra Sales Tax Tribunal partly upheld the assessment while imposing interest and penalty.

The Appellant challenged the Tribunal’s order before the Bombay High Court, contending that the transaction was merely a service because ownership and effective control of the cranes remained with it throughout.

Whether providing cranes on hire under the relevant contractual arrangements constituted a deemed sale by transfer of the right to use goods under Section 2(24)(b)(iv) of the MVAT Act?

Whether retention of ownership and effective control of the cranes by the Appellant meant that the transactions were services rather than taxable sales under the MVAT Act?

Whether the levy of interest and penalty imposed pursuant to the Tribunal’s finding was legally sustainable?

Section 2(24)(b)(iv) of the MVAT Act treats the transfer of the right to use any goods, for any purpose and for consideration, as a deemed sale.

Applying Bharat Sanchar Nigam Ltd. v. Union of India, the Court stated that a transfer of the right to use goods requires, inter alia, identified goods available for delivery, a legal right in the transferee to use them, use to the exclusion of the transferor during the relevant period, and the inability of the owner to transfer the same right to another during that period.

The Court relied on Commissioner of Sales Tax v. M/s. General Cranes, State of Maharashtra v. Sanghavi Movers Ltd., and Aurobindo Highway Services v. State of Maharashtra, which distinguish a transfer of the right to use goods from a mere licence or service where effective control remains with the owner.

It also relied on K.P. Mozika v. Oil and Natural Gas Corporation Ltd., recognising that where substantive or effective control remains with the supplier, the transaction is in the nature of a service rather than a transfer of the right to use goods.

The Court examined the contractual terms and found that the Appellant retained ownership and effective control of the cranes.

The Appellant was responsible for insurance, could replace the equipment or operator, and remained responsible for mobilisation and demobilisation; the agreements described the arrangement as a rental or hire period rather than a transfer of ownership or an exclusive legal right to use.

The hirers’ temporary possession of the cranes did not, by itself, satisfy the requirement of a transfer of the right to use goods.

Since the right to use the cranes was not transferred to the exclusion of the Appellant, the transaction amounted to a licence or service and did not constitute a deemed sale under Section 2(24)(b)(iv) of the MVAT Act.

The fact that the hirers supplied fuel did not alter the legal character of the transaction, as ownership and the relevant right in the cranes continued to remain with the Appellant.

The Tribunal’s order dated 11 July 2023, including the findings relating to MVAT, interest and penalty, was quashed and set aside.

The appeal was disposed of without any order as to costs.