Hire Agreements With APSRTC Do Not Constitute 'Deemed Sale' For VAT Liability If Possession And Control Remain With Owner: Andhra Pradesh High Court

"When the substantial control remains with the contractor and is not handed over to the user, there is no transfer of the right to use the vehicles, cranes, tankers, etc." Andhra Pradesh High Court, in a judgment dated September 3, 2026, held that bus hire agreements between private owners and the Andhra Pradesh State Road Transport Corporation (APSRTC) do not amount to a "transfer of right to use goods" under Section 4(8) of the Andhra Pradesh Value Added Tax Act, 2005.

A division bench comprising Justice Ninala Jayasurya and Justice T.C.D. Sekhar observed that such transactions, where the owner retains effective control and possession of the vehicles, are essentially service contracts and not "deemed sales" subject to VAT.

The petitioners, who entered into agreements to provide buses to the APSRTC on a per-kilometer hire basis, challenged assessment orders levying tax at 14.5% under Section 4(8) of the Act. The tax authorities contended that these agreements constituted a transfer of the right to use the buses, thereby attracting VAT as a deemed sale. The petitioners, however, argued that they maintained the buses, provided drivers, handled maintenance, and retained legal possession, meaning no transfer of control occurred.

The primary question before the court was whether the hire agreements entered into by the petitioners with the APSRTC constitute a "transfer of right to use" under Section 4(8) of the VAT Act. Additionally, the court examined whether the retention of operational and maintenance responsibility by the owner precludes the transaction from being classified as a deemed sale.

Effective Control Remains With The Owner

The court analyzed the terms of the agreements and found that the owners were responsible for insurance, driver wages, ESI contributions, and vehicle maintenance. Although the APSRTC determined routes and schedules, the physical operation and possession of the buses never shifted to the Corporation. The bench emphasized that the criteria for a "transfer of right to use" necessitates the transfer of both possession and control.

Criteria For Deemed Sale Under Article 366(29A)(d)

The court relied on the landmark five-fold test established by the Supreme Court in Bharat Sanchar Nigam Ltd. v. Union of India. The court reiterated that for a transaction to qualify as a transfer of the right to use, the transferee must have a legal right to use the goods to the exclusion of the transferor. In this case, because the petitioners remained responsible for the buses and continued to man and operate them, the Corporation did not acquire exclusive legal control.

"When the substantial control remains with the contractor and is not handed over to the user, there is no transfer of the right to use the vehicles, cranes, tankers, etc."

Service Tax Exemption And Legal Precedent

The bench drew parallels to the ruling in Hari Durga Travels v. Commissioner of Trade and Taxes, where it was held that buses provided to transport corporations do not lose their character as being under the owner’s control. Furthermore, the court noted that under Notification No.25/2012-Service Tax, such services of providing buses to state transport undertakings were even exempted from service tax, reinforcing the legislative intent that these are service-oriented transactions rather than the sale of goods.

Court Quashes Assessment Orders

Concluding that the tax authorities misapplied the law by treating these service-based agreements as "deemed sales," the bench set aside the impugned assessment orders. The court held that without the transfer of effective possession and control, the state cannot invoke the charging section for VAT under the guise of a transfer of the right to use goods.

The writ petitions were allowed, and the assessment orders were quashed, bringing relief to the private bus operators who had been subjected to tax demands under Section 4(8) of the VAT Act. This ruling clarifies that operational agreements involving heavy machinery or transport vehicles, where the owner retains administrative and physical maintenance, fall outside the purview of VAT on deemed sales.

Date of Decision: 03 September 2026