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2025 (7) TMI 79 - HC - Service TaxClassification of services - Supply of Tangible Goods Services - effective control of the supplied equipment was with the respondent as mentioned in the agreement executed between the respondent and their customers - effective control of the equipment is with the service recipient or not - transfer of right to use of the equipment by the respondent to its customer on rental basis for limited purpose comes within the purview of supply of tangible goods for use or not - payment of VAT on rentals of the equipment is a deemed sale or not - Extended period of limitation - interest - penalty. HELD THAT - Admittedly the computers printers servers computer peripherals and other equipments are hired by the assessee to their clients and they are installed in the premises of their clients and the equipments are also customized to suit the requirement of their clients. Pursuant to the agreement between the parties the transferee namely clients of the assessee have a legal right to use the good. What is prevented under the agreement is only shifting of the equipment from the location where it is installed to any other location that too with the prior permission of the assessee. Therefore this condition cannot be construed to mean that the clients of the assessee do not have a legal right to use the goods. It cannot be disputed by the Department that after the assessee has entered into an agreement with its client namely transferee during the period when the agreement is in force the assessee namely the transferor has no right to transfer very same goods in favour of their client. Therefore the transfer of such legal right in favour of the clients/transferee to the exclusion of the right of the assessee the transferor to transfer such right in favour of the third party during the subsistence of the agreement. The terms of the agreement makes it clear that the transferor namely the assessee cannot transfer the equipment to third parties during the period when the agreement is in force. In fact the Department has not disputed this position and not made any allegation in the show-cause notice in this regard. Extended period of limitation - interest - penalty - HELD THAT - The Hon ble Supreme Court while dealing with such issue has pointed out that the concept of suppression amounts to that which one is legal to state but one intentionally or deliberately or consciously does not state. In other words the terms were mainly to deliberately omit to state certain things and it was held that the extended period of limitation is inapplicable in the absence of suppression of facts and hence absence of an intent to evade payment of duty. In Uniworth Textiles Ltd. Vs. Commissioner of Central Excise Raipur 2013 (1) TMI 616 - SUPREME COURT it was held that every non-payment/non-levy of duty does not attract extended period. There must be deliberate default. The conclusion that mere non-payment of duty is not equal to collusion or willful misstatement or suppression of facts is untenable. Furthermore it was held that the act contemplated a positive action which buttresses the negative intention of willful default - The burden to justify invocation of the extended period lies with the Department and the assessee cannot be asked to provide his bona fide when prima facie acted in a bona fide manner. The assessee has time and again contended that they have a service tax registration in respect of the contracts which they enter into with their clients for providing annual maintenance etc. in relation to the hiring of the equipments to the clients. It is not disputed that the assessee has been filing their service tax returns promptly and the entire service tax liability has been paid. Therefore the Department was aware of the nature of the transaction done by the assessee and it can hardly be stated that there was willful suppression of facts done by the assessee with the intention to evade payment of duty. Therefore the Department could not have invoked the extended period of limitation. Thus having decided both the issues in favour of the assessee the question of levy of penalty or interest could not arise. The learned Tribunal was justified in allowing the assessee s appeal and setting aside the order of adjudication - the substantial questions of law as suggested are answered against the revenue - Appeal dismissed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court were: a. Whether the service provided by the respondent constitutes 'Supply of Tangible Goods Services' when the effective control of the supplied equipment remains with the respondent as per the agreement with their customers. b. Whether the supply of tangible goods for use by the customer, without transferring possession and effective control, amounts to 'Supply of Tangible Goods Service' under the relevant statute. c. Whether the Tribunal erred in holding that effective control of the equipment lies with the service recipient despite the agreement stating otherwise. d. Whether the transfer of the right to use equipment on a rental basis for a limited purpose falls within the definition of supply of tangible goods for use under Section 65(105)(zzzzj) of the Finance Act, 1994. e. Whether payment of VAT on rentals of equipment constitutes a deemed sale under Article 366(29A) of the Constitution of India. f. Whether the Tribunal erred in not considering the Supreme Court's ruling in BSNL vs. Union of India regarding control and permission requirements over equipment use and maintenance. g. Whether the extended period of limitation for recovery of service tax and imposition of penalties can be invoked in the absence of willful suppression or fraud. 2. ISSUE-WISE DETAILED ANALYSIS Issue a, b, c, d & f: Nature of the transaction - 'Supply of Tangible Goods Service' vs. 'Transfer of Right to Use' Relevant Legal Framework and Precedents: The Court primarily relied on Section 65(105)(zzzzj) of the Finance Act, 1994 which defines 'supply of tangible goods service' and the Supreme Court decision in BSNL vs. Union of India (2006), which laid down five attributes to constitute a transfer of the right to use goods. Court's Interpretation and Reasoning: The Court examined the terms of the agreement between the assessee and their clients, which involved hiring out desktop computers, servers, printers, and peripherals with certain restrictions such as requiring prior permission for removal or shifting, prohibition on alteration, and control over maintenance and repair by the supplier or its approved agents. The Court applied the five attributes from the BSNL judgment to determine if there was a transfer of the right to use goods:
The Court concluded that all attributes as per BSNL were fulfilled, indicating that the transaction was a transfer of the right to use goods, not merely a supply of tangible goods service. Key Evidence and Findings: The written agreement's clauses restricting removal, alterations, and requiring permission for maintenance were considered but did not negate the transfer of the right to use. The Court noted that the client's legal right to use the equipment was intact despite these restrictions. Application of Law to Facts: The Court held that the restrictions do not defeat the transfer of right to use. The effective control and possession were transferred to the clients, and the supplier's control was limited to certain agreed conditions, which is consistent with a rental or lease transaction transferring right to use. Treatment of Competing Arguments: The Revenue argued that the supplier retained effective control and possession, thus the transaction was 'supply of tangible goods service' attracting service tax. The Court rejected this, emphasizing the legal right of use by the client and the BSNL criteria. Conclusion: The transaction constituted a transfer of right to use goods, attracting VAT as a deemed sale under the Constitution, and not service tax under 'supply of tangible goods service'. Issue e: Payment of VAT on rentals as deemed sale Relevant Legal Framework: Article 366(29A) of the Constitution of India defines 'sale' to include transfer of right to use goods for any purpose. Court's Reasoning: Since the transaction involved transfer of right to use, the rental payments were subject to VAT as deemed sale. The assessee had paid VAT on such rentals during the relevant period, which the Court accepted as correct. Conclusion: Payment of VAT on rentals was appropriate and consistent with the nature of the transaction as a deemed sale. Issue g: Invocation of extended period of limitation and penalties Relevant Legal Framework and Precedents: Section 73(1) of the Finance Act allows recovery within three years, extended to five years if there is willful suppression of facts with intent to evade tax. The Supreme Court's decision in Uniworth Textiles Ltd. vs. Commissioner of Central Excise (2013) was relied upon, which clarified that extended limitation applies only in cases of deliberate default, suppression, or fraud. Court's Interpretation and Reasoning: The Court examined the show cause notice and found no allegation or evidence of willful suppression, collusion, or fraud by the assessee. The assessee had filed service tax returns regularly and paid service tax on other services rendered. The Department was aware of the nature of the transactions and had accepted VAT payments. Application of Law to Facts: Mere non-payment of service tax on the disputed transactions did not amount to willful suppression. The burden to justify invocation of extended limitation lies on the Department, which was not discharged. Treatment of Competing Arguments: The Department argued that extended limitation was justified due to evasion. The Court rejected this, emphasizing the absence of deliberate default. Conclusion: Extended period of limitation and penalties under Sections 75, 77, and 78 of the Finance Act could not be invoked. 3. SIGNIFICANT HOLDINGS The Court's crucial legal reasoning includes the following verbatim excerpt from the BSNL judgment applied to the facts: "To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes: a. There must be goods available for delivery; b. There must be a consensus ad idem as to the identity of the goods; c. The transferee should have a legal right to use the goods-consequently all legal consequences of such use including any permission or licenses required there for should be available to the transferee; d. 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 licence to use the goods; e. Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others." The Court established the core principle that restrictions such as requiring permission for shifting or maintenance do not negate the transfer of the right to use goods. It was held that the transaction was a transfer of right to use goods attracting VAT as a deemed sale under the Constitution, and not a supply of tangible goods service attracting service tax. Regarding limitation, the Court affirmed that extended limitation applies only in cases of willful suppression or fraud, which was absent here, thus negating the Department's claim for extended recovery and penalties. Final determinations on each issue were against the Revenue's appeal, affirming the Tribunal's decision in favor of the assessee.
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