RIGHT TO USE IS A LEGAL ISSUE

[Dr. Sanjiv Agarwal]

For the purpose of Service Tax, declared services include transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods.

CBEC vide letter No. 334/1/2012-TRU dated 16.03.2012 explains ‘transfer of right to use goods’ as follows –

Transfer of right to use goods is a well recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to  use goods. ‘Transfer of right of goods’ involves transfer of possession and effective control over such goods in terms of the judgment of the Supreme Court in the case of State of Andhra Pradesh v Rashtriya Ispat Nigam Ltd. [Judgment dated 6/2/2002 in Civil Appeal no. 31 of 1991] 2002 (3) TMI 705 - SUPREME COURT OF INDIA. Transfer of custody along with permission to use or enjoy such goods, per se, does not lead to transfer of possession and effective control.

The test laid down by the Supreme Court in the case of Bharat Sanchar Nigam Limited vs Union of India [2006 (3) TMI 1 - SUPREME COURT] to determine whether a transaction involves transfer of right to use goods, which has been followed by the Supreme Court and various High Courts, is as follows:

• There must be goods available for delivery;
• There must be a consensus ad idem as to the identity of the goods;
• The transferee should have legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;
• For the period during which the transferee has such legal right , it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statute, viz., a ‘transfer of the right to use’ and not merely a license to use the goods;
• Having transferred, the owner cannot again transfer the same right to others.

Whether a transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as a whole, to determine the nature of the transaction.

It may be noted that transfer of right to use goods is a deemed sale under article 366 (29A) of the Constitution of India and section 65B(44) which defines ‘service’ in clause (1a) excludes any such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause 29A of article 366 of the Constitution.

Transfer of right to use goods is a question of fact to be determined in each case having regard to terms of contract under which transfer takes place, intention of parties and their attendant circumstances.

As observed in a recent decision in G.S. Lamba & Sons v. State of Andhra Pradesh [2011 (1) TMI 1196 - ANDHRA PRADESH HIGH COURT] from the judicial decisions, the settled essential requirement of a transaction for transfer of the right to use goods are:

i)          It is not the transfer of the property in goods, but it is the right to use property in goods;

ii)         Article 366(29A)(d) read with the latter part of the clause (29A) which uses the words, "and such transfer, delivery or sup­ply... " would show that the tax is not on the delivery of the goods used, but on the transfer of the right to use goods re­gardless of when or whether the goods are delivered for use subject to the condition that the goods should be in existence for use;

iii)        In the transaction for the transfer of the right to use goods, delivery of goods is not a condition precedent, but the delivery of goods may be one of the elements of the transaction;

 iv)           The effective or general control does not mean always physical control and, even if the manner, method, modalities and the time of the use of goods is decided by the lessee or the customer, it would be under the effective or general control over the goods; and

 v)            The approvals, concessions, licences and permits in relation to goods would also be available to the user of goods, even if such licences or permits are in the name of owner (transferor) of the goods, and

 vi)           During the period of contract exclusive right to use goods along with permits, licences etc., vests in the lessee."

 Also, high court followed the following interpretation principles for documents-

 i)     Construe the document as a whole.

 ii)    To understand the meaning of a document or a part of it from documents itself.

 iii)   To give literal meaning to the words used in a document.

 iv)   In the event of intrinsic incongruities and inconsistencies flowing from the words and language used in the document, the inten­tion would prevail over the words used. The intention of the parties has to be determined from the attending circumstances leading to the transaction.        ­

 Following observations are also worth noting –

 i)     In other words, the right to use goods arises only on the transfer of such right to use goods and that the transfer of right is the sine quo non for the right to use any goods. The contract involved provision of transportation service for shipping RMC by hiring specifically designed transit mixers. The effective control of running the mixers and the disciplinary control remained with the contractor agreeing to provide the above service.

 ii)    Article 366(29A)(d) would show that the tax  is not on the delivery of goods used but  on the transfer of the right to use goods , regardless of when or whether goods are delivered for use. This is subject to the condition that goods are in existence for use. Delivery of goods is not a condition precedent, but one of the elements of the transaction.

 iii)   Effective control does not mean always physical control and even if the manner, method modalities and time of the use goods is decided by the lessee, it would under the general control over the goods.

 iv)   During the period of contract, exclusive right to use goods along with permits, licences etc. vests in the lessee. Although the drivers are appointed by the lessor, their roster fixed by them, licences, permits and insurance are taken in their names and they renew them. However, the product is delivered to customer of lessees.

 v)    The entire use in the property in goods is to be exclusively utilized for a period under contract by lessee.

 vi)   The existence of goods is identified and transit mixers operate and are exclusively used for 42 months in the business of the lessee. In putting the property in transit mixers to economic use of the lessee, the lessors figure nowhere. It thus conclusively leads to the conclusion that lessor transferred the right to use the goods to the lessee.

 Thus, it can be said that whether the transaction is deemed sale or a declared service is a question of fact in a specific case and situation and may not have any one definite view.

 

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