IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 22.07.2011 Coram THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN AND THE HONOURABLE MR.JUSTICE M.JAICHANDREN TC.(R). No. 1127 of 2006 and TCMP.No. 1583 of 2006 Aban Loyd Chiles Offshore Limited 766, Anna Salai Chennai – 2 ... Petitioner -vs- The State of Tamil Nadu rep.by the Deputy Commissioner (CT) Chennai (East) Division Greams Road, Chennai – 6 ... Respondent Revision Petition filed under Section 38 of the Tamil Nadu General Sales Tax Act to revise the orders of the Sales Tax Appellate Tribunal (Main Bench), Chennai passed in STA. No.1493/2001 dated 2.12.2005 against the order in Appeal No.and year AP 191/200, dated 23.6.2000, passed by the Appellate Assistant Commissioner (CT)IV, Chennai-108, and against the order of the TNGST/073213/87-88 dated 10.3.2000 passed by the Commercial Tax Officer, Anna Salai III Assessment Circle, Chennai. For Petitioner : Mr.S.Ramanathan For respondent : Mr.R.Sivaraman, Special Government Pleader (Taxes) ORDER (Order of the Court was made by CHITRA VENKATARAMAN,J) The assessee is on revision as against the order of the Tribunal by raising the following substantial questions of law:- "(i) Whether there is transfer of right to use the driling unit of the petitioner to the ONGC as per the terms and conditions put forth in the agreement entered with by them so as to attract the levy of Lease tax under Section 3A of the TNGST Act? https://hcservices.ecourts.gov.in/hcservices/ (ii) Whether the Honourable Tribunal was correct in holding that the drilling rings were under the effective control of the ONGC when the assessing officer himself has observed that the drilling unit was operated by the petitioner deploying their own man power and personal which was done as per the specifications of ONGC? (iii) Whether the Honourable Tribunal was correct in holding that most responsibility rest with ONGC as per Annexure "D" when the Annexure "D" speaks about the materials to be supplied by ONGC for utility like fresh water, diesel, fuel, oil, drilling fluid, cement, mud chemicals and when it has nothing to do with transfer of the drilling unit? (iv) Whether the petitioner has transferred the drilling unit to the ONGC (ie) whether delivery has been made and possession and control of the drilling unit were given to the ONGC as per the principles laid down by the decision of the Bombay High Court reported in 75 STC 217 in the case of 20th Century Finance Corporation with reference to when the transfer of right to use is completed? (v). The terms and conditions of the Agreement stipulates that the drilling unit would be operated by the petitioner and the maintenance of the drilling unit was of the petitioner. In such circumstances as per the principles laid down by the Supreme Court reported in 126 STC page 114 in the case of Rashtriya Ispat Nigam Ltd. Whether there is transfer of right to use so as to attract the levy of tax under section 3-A of the TNGST Act?" 2. The assessment year relates to 1987-88. It is seen from the facts herein that the assessee had an agreement with ONGC for conducting drilling operation in the offshore waters of India. The contention of the assessee was that drilling equipment always remained with the assessee, who are the contractors. The effective control and possession was never handed over to ONGC. The drilling operations were done only by the personnel of the assessee. In the circumstances, there was no transfer of right to use goods to fall under Section 3-A of the Tamil Nadu General Sales Tax Act. The assessee also placed reliance on the various clauses in the agreement only to point out that the nature of work executed was more in the nature of services. In the circumstances, the assessee contended that receiving of service charges would not fall under Section 3-A of the Tamil Nadu General Sales Tax Act. However, the contention of the assessee was rejected by the Assessing Authority by holding that since the operation itself was to depend on ONGC's specifying the area, practically, drilling units were under the control and disposal of the ONGC. Under the agreement, right to use the drilling machine https://hcservices.ecourts.gov.in/hcservices/ is available to ONGC wherever and whenever they wanted. There was transfer of right to use the goods implied under the contract. Hence, the Assessing Authority rejected the plea of the assessee. 3. As against the order of the Assessing Authority, the assessee went on appeal before the Appellate Assistant Commissioner, who agreed with the contention of the assessee. The first Appellate Authority pointed out that terms and conditions of the agreement clearly prove that the drilling units should be operated by the assessee only. It was further pointed out that when the effective control and use of drilling units was with the assessee, the mere fact that the assessee had to operate on the area designated by ONGC, by itself would not make the activity of the assessee to fall under Section 3-A of the Tamil Nadu General Sales Tax Act. Thus, the first Appellate Authority allowed the appeal filed by the assessee. 4. As against the order of the first Appellate Authority, the Revenue went on appeal before the Sales Tax Appellate Tribunal. A perusal of the order of the Tribunal shows that the Tribunal drew its attention to Annexure D of the agreement, which provided for the assessee supplying equipments with technical persons for which charges were paid. Going by the said aspect, when the rigs was hired for specific purpose and were under the effective control of ONGC, even though the agreement was silent on the services, the agreement had to be treated as one attracting the provisions of Section 3-A of the Tamil Nadu General Sales Tax Act. Thus, the Tribunal upheld the assessment. 5. As regards penalty levied, having regard to the the provision under Section 12(3) of the Tamil Nadu General Sales Tax Act, time limit for making imposition of penalty expiring on 31.3.1993. The Tribunal held that no penalty was attracted. Thus, it affirmed the view of the first Appellate Authority on this aspect. As against the order passed by the Sales Tax Appellate Tribunal, the assessee is on revision before this Court. 6. Learned counsel for the assessee placed reliance on the various clauses of the agreement and submitted that the case of the assessee clearly falls within the scope of the decision of the Supreme Court in the case of STATE OF A.P. v. RASHTRIYA ISPAT NIGAM LTD., - 126 STC 114. He contended that even if the machines were handed over to the contractor therein, the principle is that so long as no effective control over the goods remained with the owner, there is no transfer of right to use goods. Learned counsel for the assessee also placed reliance on the decision of the Apex Court in the case of AGGARWAL BROTHERS v. STATE OF HARYANA – 113 STC 317 and submitted that mere handing over of possession by itself would not result in the transfer of right to use goods. Thus, so long as the machineries are under the effective control of the operator, direction given by the ONGC as to the location where drilling https://hcservices.ecourts.gov.in/hcservices/ operation are to be conducted does not result in transfer of right to use goods so as to attract Section 3-A of the Tamil Nadu General Sales Tax Act. 7. Per contra, learned Special Government Pleader (Taxes) appearing for the Revenue took us through Annexure D of the agreement and contended that the operation of the rigs was specifically at the disposal of the ONGC to operate in areas specified by ONGC. Thus, even if the possession and operation was with the assessee, the entire operation undertaken by the assessee was controlled by ONGC. Section 3-A of the Tamil Nadu General Sales Tax Act does not contemplate transfer of property in goods, but only transfer of right to use goods alone. The Tribunal rightly came to the conclusion that the transaction is assessable only under the provisions of Section 3- A of the Tamil Nadu General Sales Tax Act. 8. Learned Special Government Pleader (Taxes) also referred to the decision of the Apex Court in the case of AGGARWAL BROTHERS v. STATE OF HARYANA – 113 STC 317, as well as the decision of the Karnataka High Court in the case of GREAT EASTERN SHIPPING COMPANY LIMITED v STATE OF KARNATAKA AND OTHERS – [2004] 136 STC 519, and submitted that going by the above decisions and Section 3-A of the Tamil Nadu General Sales Tax Act, that the emphasis being the transactions of the assessee, hence, has to be treated as one attracting the provisions of Section 3-A of the Act. 9. Heard the learned counsel for the assessee as well as learned Special Government Pleader (Taxes). 10. Before going into the contentions raised by learned counsel on either side, the relevant clauses in the agreement has to be seen. The agreement contained the nature of work executed by the assessee which is stated as follows:- "WHEREAS, OPERATOR desires to have drilling operations conducted in the Offshore waters of India, as may be designated by OPERATOR, AND WHEREAS, CONTRACTOR is owner of Jack-up Rig "GRIFFIN ALEXANDER II" (hereinafter referred to as "Drilling Unit") and willing to perform such drilling operations with Drilling Unit and is able to furnish to OPERATOR its personnel in adequate number for the safe and efficient operations of the Drilling Unit as referred to in Annexure 'A' and Annexure 'B'. " 11. In consonance with the operation thus be conducted by the Contractor, Article – 3 of the agreement provides for operating rate per day when the drilling unit is in operation. Article 3.6 provides for non operating rate/ stand by rate when the unit is not operating and is either waiting for materials, orders, instructions, programme https://hcservices.ecourts.gov.in/hcservices/ from operator waiting on weather/ waiting on cement to set, the contractor (assessee) shall be paid a non operating date rate. Article 3.11 provides for zero rate when the unit is unable to operate or carry normal drilling operation due to the requirements of personnel or equipments or the unit could not move in water depths. Article 3.12 provides for personnel mobilization and performance bond. Article 4 deals with materials, supplies, equipment, service and personnel to be furnished by contractor. Article 5 deals with materials, supplies, equipment, services and personnel to be furnished by operator. The Tribunal placed emphasis on this article to hold that there was transfer of right to use the goods. It held that given the fact, the operator has responsibility of supply of materials and personnel, it indicated that there was effective control over the machinery by the operator. Article 5 refers to materials, supplies, equipment, services and personnel to be furnished by ONGC. They are listed under Annexure D. A perusal of the same shows supply of fresh water for drilling, cementing and wash down of ONGC equipment, spare parts and operating supplies for operator's (ONGC) equipment was on the ONGC. The maintenance of operators equipment upto the ability of the contractors on board personal was on the contractor. For obtaining third party drilling services, was on the ONGC operator. 12. Thus, considering the various clauses in the responsibilities and liabilities on the respective parties and the nature of operations of the assessee in carrying on drilling operations on the sea bed as per the direction of ONGC with its own personnel, hence has to be looked at from the stand point of the nature of work involved and peculiarity of the agreement. Given the fact that access to the drilling place has to be identified only by ONGC and that the nature of work entrusted to the contractor/ assessee herein, is only to render services in drilling operation with its own personnel, we do not find any ground in the agreement to support the case of the Revenue that there was transfer of right to use the goods. 13. It is no doubt true that in the the case of AGGARWAL BROTHERS v. STATE OF HARYANA – 113 STC 317, the Apex Court agreed with the case of the Revenue to hold that there was transfer of right to use goods, wherein the appellants therein owned shuttering which they transferred for consideration to building contractors for use in the construction of buildings. The nature of work entrusted to the assessee therein was only to carry on the drilling operations by using its personnel and equipment. Mere fact that the operations have to be done in the ear marked area by ONGC, by itself does not bring the machines as under the effective control of ONGC. Given the nature of work and the place of work, necessarily, it is only the ONGC which has to specify the earmarked place where the drilling operation was to be carried on. The fact ONGC had the necessary authority to identify the area of operation, may at best point out https://hcservices.ecourts.gov.in/hcservices/ ONGC's control over the site, but, that by itself, would not mean that ONGC had the possession and control of either the machinery or its operation, to result as the leasing transaction. 14. Going through the clauses in the agreement, we find the case of the assessee fits in with the decision of the Apex Court reported in 126 STC 114 - STATE OF A.P. v. RASHTRIYA ISPAT NIGAM LTD. The assessee therein which owned the Visakapatnam Steel Project, allotted different part of the project work to the contractors to formulate the work by the contractors with the use of sophisticated machinery for the purpose of being used in execution of the contracted works and received the charges for the same. The Sales Tax authorities assessed the receipts as falling under transfer of right to use the goods. On an assessment made under Section 5E of the Andhra Pradesh General Sales Tax Act which is similar to Section 3A of the Tamil Nadu General Sales Tax Act, in the decision reported in [1990] 77 STC 182 (RASHTRIYA ISPAT NIGAM LIMITED v. COMMERCIAL TAX OFFICER, COMPANY CIRCLE, VISAKHAPATNAM), the Andhra Pradesh High Court held that since there is no transfer of right to use goods, there could be no occasion for levying tax under Section 5E of the Andhra Pradesh General Sales Tax Act. A mere provision of a facility which involves the use of goods or even the right to use goods, per se, is not sufficient to attract the charging provision. "There must be a transfer of that right." The High Court further held that "the transfer of right to use goods necessarily involves delivery of possession by the transferor to the transferee. Delivery of possession to a thing must be distinguished from its custody." On the terms of agreement, it was held "Thus the essence of transfer is the passage of control over the economic benefits of the property, which results in terminating the rights and other relations in one entity and creating them in another." Going through the agreement, the Court held that all that the contractor was entitled was to make use of the machinery for the purposes of execution of the work for the assessee and there was no transfer of right to use as such, in favour of the contractor. The effective control of the machinery, even while it was in use by the contractor, was that of the assessee. Thus the High Court held that the charge under Section 5E of the Andhra Pradesh General Sales Tax Act was not attracted. 15. Confirming the decision reported in [1990] 77 STC 182 (Rashtriya Ispat Nigam Ltd. Vs. Commercial Tax Officer, Company Circle, Visakhapatnam), in the appeal preferred by the State, in the decision reported in [2002] 126 STC 114 (State of A.P. Vs. Rashtriya Ispat Nigam Ltd. (S.C.), the Apex Court held that so long as the effective control of machinery was with the owner, even while it was in use of the contract done and the contractor was not free to make use of the machinery for work other than the project work or move it out during the period the machinery was in its use, the requirements for attracting the charge did not stand satisfied. The fact that the contractor would be responsible for the safe custody while it was on https://hcservices.ecourts.gov.in/hcservices/ the site, did not militate against the owner's possession and control of the machinery. Thus the Apex Court held that passing of an effective control of the machinery to the contractor was a sine qua non for the purpose of attracting the levy under the concept of deemed sale relating to transfer of right to use goods. Thus the emphasis in the case of transfer of right to use goods, as laid down by the Apex Court in the decision reported in [1999] 113 STC 317 (SC) (Aggarwal Brothers Vs. State of Haryana and Another), is the transfer of the right to use goods and not transfer of goods. The above-said decisions viz., [1999] 113 STC 317 (SC) (Aggarwal Brothers Vs. State of Haryana and Another), and [2002] 126 STC 114 (State of A.P. Vs. Rashtriya Ispat Nigam Ltd. (S.C.), came up for consideration in the decision reported in [2006] 145 STC 91 (Bharat Sanchar Nigam Ltd. Vs. Union of India (S.C.) 16. Referring to the contract between telecom service provider and subscriber, the Apex Court pointed out as follows: "119. It is not possible to interpret the contract between the service provider and the subscriber that the consensus was to mutilate the integrity of contract as a transfer of right to use goods and rendering service. Such a mutilation is not possible except in the case of deemed sale falling under sub clause (b). Nor can the service element be disregarded and the entirety of the transaction be treated as a sale of goods (even when it is assumed that there is any goods at all involved) except when it falls under sub clause (f). This will also result in an anomaly of the entire payment by the subscriber to the service provider being for alleged transfer of a right to use goods and no payment at all for service. The licence granted by the Central Government fixes the tariff rates and all are for services." 17. Thus, the decision of the Apex Court show that in the case of deemed sale relating to transfer of right to use any goods for any purpose, what is required to be seen is the intention of transfer of right to use the goods, which in turn imply transfer of effective control for goods. Read in the context of the decision reported in [2002] 126 STC 114 (State of A.P. Vs. Rashtriya Ispat Nigam Ltd. (S.C.), so long as the owner retains effective control over the goods, mere possession given without a right accompanying thereto to result in the transfer of right to use the goods as he likes, the question of bringing the transaction within the corners of the charging provision does not arise. As the Andhra Pradesh High Court pointed out in the decision reported in [1990] 77 STC 182 (Rashtriya Ispat Nigam Ltd. Vs. Commercial Tax Officer, Company Circle, Visakhapatnam), delivery of possession must be distinguished from its custody. Delivery of possession may be one of the elements of transfer of right to use, but without a transfer of right to use, the https://hcservices.ecourts.gov.in/hcservices/ transaction in question cannot fall under the charging provision, since, as pointed out in the decision reported in [1999] 113 STC 317 (SC) (Aggarwal Brothers Vs. State of Haryana and Another), it is the transfer of right to use and not transfer of goods which attracts the charge under the deemed sale under Section 3A of the Tamil Nadu General Sales Tax Act. 18. In the light of the various clauses in the agreement, evidencing the fact that the effective control of the rigs remained with the contractor, that the assessee merely gave a directions where the rigs were to operate, even in the context of the assessee giving directions to the contractor to take the rigs to the specified points, the said direction per se does not mean that the assessee had complete control over the machinery. Thus a reading of the various terms show that what is given to the assessee by the contractor was his services through the rigs owned by the contractor and going by the decision referred to above, we have no hesitation in accepting the assessee's case. 19. The assessee in the Karnataka case had entered into a Charter party agreement with New Mangalore Port Trust agreeing to make available the services of the tug for the purposes mentioned in the agreement along with the master and other personnel of the appellant to the port trust for a period of six months. For a plea made by the assessee before the High Court that the provisions of Section 5-C of the Karnataka Sales Tax Act, did not apply to the transactions in question, the Karnataka High Court pointed out to the terms of the agreement that the tug was placed at the disposal of the port trust, who had control over the tug. Going by the various stipulations in the agreement, the High Court came to the conclusion that there was a transfer of the tug by the assessee to the port trust. Thus, the High Court came to the conclusion that the transactions in question amounted to deemed sale on transfer of right to use. The said decision arrived at not only after noting the decision of the Apex Court referred in the preceding paragraph, but by referring to the various clauses in the agreement. Thus, going by the facts therein, the Karnataka High Court upheld the Revenue's contention as to the assessability of the transactions. 20. As far as the case before us is concerned, as already pointed out, considering the various clauses in the agreement, indicating that the effective control ever remained with the assessee, the mere fact that the area of operations were as stated by ONGC does not make rigs as come under the effective control of the ONGC to bring transactions as assessable under Section 3-A of the Act. Thus, applying the decision of the Apex Court reported in [2002] 126 STC 114 – STATE OF A.P. v. RASHTRIYA ISPAT NIGAM LIMITED and the subsequent decision reported in [2006] 145 STC 91 – BHARAT SANCHAR NIGAM LIMITED v. UNION OF INDIA, we have no hesitation in accepting the assessee's contention thereby setting aside the order of the https://hcservices.ecourts.gov.in/hcservices/ Tribunal. We hold that the transactions did not amount to transfer of right to use the goods to fall under Section 3-A of the Tamil Nadu General Sales Tax Act. 21. In the light of the above, we have no hesitation in accepting the plea of the assessee. 22. As far as the reliance placed on the decision of the Karnataka High Court reported in [2004] 136 STC 519 - GREAT EASTERN SHIPPING COMPANY LIMITED v STATE OF KARNATAKA AND OTHERS is concerned, as rightly pointed out by the Karnataka High Court, each case has to be considered on the strength of various clauses in the contained in the agreement and in the nature of work to be discharged. In the circumstances, we agree with this aspect. We do not have any hesitation in accepting the case of the assessee that the case does not fall under the charging provisions of the Tamil Nadu General Sales Tax Act. 23. In the circumstances, the order of the Tribunal is set aside and the Tax Case Revision stands allowed. No costs. Consequently, connected TCMP is closed. Sd/- Deputy Registrar //true copy// Sub Asst.Registrar bg To 1. The Deputy Commissioner (CT), Chennai (East) Division, Chennai 2. The Chairman, Tamil Nadu Sales Tax Appellate Tribunal, Main Bench, IIIrd Floor, Rajaji Bhavan, Besant Nagar, Chennai-90. 3. The Appellate Assistant Commissioner (CT) IV, 6th Floor,