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2024 (9) TMI 1727 - AT - Service TaxClassification of transactions involving lease or hire of machinery and equipment - supply of tangible goods for use service liable to service tax or transfer of right to use goods treated as deemd sale liable to VAT - HELD THAT - The Assessee have rented out the textile machineries to M/s. Arvind Ltd for manufacture of textile products. The department s case is that leasing of machineries to M/s. Arvind Ltd is classifiable under supply of tangible goods for use service. Right to possession and effective control of machineries have been transferred to the lessee M/s. Arvind Ltd. Moreover since the right to possession has been transferred the transaction is of deemed sale in terms of Article 366 (29A) of the Constitution of India and the Assessee are admittedly paying the said VAT. Therefore this fact also reinforces the contention of the Assessee that right to possession and effective control have been transferred to the lessee M/s. Arvind Ltd. Therefore The transaction is of deemed sale and not of supply of tangible goods for use service. Hence the same is not liable for service tax. Similar view was taken by CESTAT Mumbai in the case of UFO Moviez India Ltd 2017 (9) TMI 507 - CESTAT MUMBAI wherein on the basis of the fact that the transaction was of deemed sale in terms of Article 336 (29) A it was held that the activity same is not classifiable as service of supply of tangible goods for use. Conclusion - The transaction is a deemed sale and not a supply of tangible goods for use service. Appeals filed by Assessee are allowed.
The core legal questions considered by the Tribunal revolve around the classification of transactions involving lease or hire of machinery and equipment, specifically whether such transactions constitute a "supply of tangible goods for use" service liable to service tax or amount to a "transfer of right to use goods" deemed to be a sale liable to VAT under Article 366(29A)(d) of the Constitution of India. The issues include:
1. Whether the lease agreements transferring possession and effective control of machinery to the lessee fall under the taxable service category of "supply of tangible goods for use" or constitute deemed sales under VAT law. 2. The interpretation of the definition of "supply of tangible goods for use service" under Section 65(105)(zzzzj) of the Finance Act, 1994, and its applicability to the facts. 3. The relevance and effect of the transfer of right to possession and effective control in determining the nature of the transaction. 4. The interplay between service tax and VAT laws, particularly when VAT has been paid on the transaction. 5. The principles of contract interpretation relevant to ascertaining the parties' intention regarding possession and control. 6. The applicability of judicial precedents on the transfer of right to use goods and supply of tangible goods for use service. Issue-wise Detailed Analysis 1. Classification of Lease Transactions: Service Tax or Deemed Sale The Tribunal examined the statutory definition of "taxable service" under Section 65(105)(zzzzj) of the Finance Act, which covers services relating to supply of tangible goods including machinery "for use, without transferring right of possession and effective control." The Court emphasized that for a transaction to fall under this service category, the lessor must retain possession and effective control during the lease period. If possession and effective control are transferred to the lessee, the transaction is outside the scope of this taxable service. The Tribunal scrutinized the lease agreements, particularly the one dated 11.08.2009, and found that the lessee was granted possession and effective control of the machinery. The lessee was responsible for maintenance, repair, and use of the machinery for their industrial purposes. The lessor retained ownership but did not retain possession or control. This fact was corroborated by the payment of VAT by the Assessee, treating the transaction as a deemed sale under Article 366(29A)(d). Accordingly, the Tribunal concluded that the transaction was a deemed sale and not a supply of tangible goods for use service. Hence, service tax demand was unsustainable. 2. Legal Framework and Precedents on Transfer of Right to Use Goods The Tribunal extensively reviewed constitutional provisions, statutory amendments, and judicial decisions to elucidate the nature of "transfer of right to use goods" as a deemed sale under VAT laws. Article 366(29A)(d) of the Constitution defines "tax on sale or purchase of goods" to include "transfer of the right to use any goods for any purpose" as a deemed sale. The Forty-sixth Amendment to the Constitution expanded the scope of sales tax to cover such transfers, even if physical delivery is not involved. Judicial precedents clarified that the taxable event is the transfer of the right to use goods, not the delivery or actual use. The transfer vests exclusive possession and effective control in the transferee for the contract period. The locus of deemed sale is the place where the right is transferred, irrespective of the goods' physical location. Key Supreme Court and High Court decisions cited include:
The Tribunal also referred to a series of cases tabulated in the judgment, which consistently held that the decisive factor is the transfer of possession and effective control and the intention of the parties as reflected in the contract. 3. Interpretation of Contract and Intention of Parties The Tribunal underscored the importance of construing the lease agreements as a whole to determine the nature of the transaction. It relied on established principles of contract interpretation, including:
Applying these principles, the Tribunal found that the agreements clearly transferred possession and effective control to the lessee, with the lessee bearing responsibility for maintenance, repair, and operation. Restrictions imposed by the lessor did not negate the transfer of possession and control. The absence of date and place of execution in the agreement was held not to invalidate the contract or affect its enforceability, especially when other clauses indicated the commencement date and place of contract. 4. Treatment of Competing Arguments The Revenue argued that conditions such as maintenance by the lessor, restrictions on use, and provision of operators indicated retention of effective control by the lessor, thereby classifying the transaction as a taxable service. The Tribunal rejected this by noting that restrictions do not preclude transfer of possession and control, especially when the lessee assumes responsibility for custody, operation, and liabilities. The Tribunal also considered the Revenue's contention regarding the period prior to 16-05-2008 when the service tax on supply of tangible goods for use was not in effect. It remanded the issue for fresh adjudication, as the main ground for dropping demand (service tax applicability from 16-05-2008) was no longer relevant after holding that the transaction is not a service but a deemed sale. 5. Application of Law to Facts and Key Findings The Tribunal applied the legal framework and precedents to the facts of the case, concluding:
6. Reliance on Similar Judgments The Tribunal relied on several judgments of this Tribunal and High Courts, including:
The ratio of these cases was held directly applicable to the present facts. Significant Holdings "From the plain reading of the above definition, to bring a lease agreement under ambit of service tax under the category of supply of tangible goods for use service it is necessary that during the lease period the right to possession and effective control must be with the lessor and if the right to possession and effective control is transferred to the lessee then such lease will not be covered under the category of supply of tangible goods for use service." "The transaction is of deemed sale in terms of Article 366 (29A) of the Constitution of India and the Assessee are admittedly paying the said VAT. Therefore, this fact also reinforces the contention of the Assessee that right to possession and effective control have been transferred to the lessee." "The essential requirements 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 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; (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." "The agreement has to be read as a whole to determine the nature of the transaction." "Merely because restrictions are placed on the lessee, it cannot be said that there is no right to use by the lessee." "If VAT is payable on the transaction, then service tax levy is not attracted." "The transaction is a deemed sale and not a supply of tangible goods for use service." "The impugned orders are set aside. Appeals filed by Assessee are allowed and appeal filed by Revenue is dismissed."
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