Finance Act, 2008 has introduced a new taxable service, supply of tangible goods service in the service tax net w.e.f. 16.5.2008 vide Notification No. 18/2008-ST dated 10.5.2008. The gross amount charged or total consideration received for supply of tangible goods by the service provider shall be chargeable to service tax.
Meaning of Supply of Tangible Goods
The words ‘supply of tangible goods’ or ‘supply’ or ‘tangible goods’ have not been defined in statutory provisions of service tax. While goods have been defined in section 65(50) of Finance Act, 1994 to mean the same as in section 2(7) of Sale of Goods Act, 1930 other terms will have to be understood as per their general meanings.
‘Tangible goods’ are any sort of merchandise which actually exist in one form or the other. Paper, pen, furniture, computers, cars etc. are all examples of tangible goods. Tangible means those goods which have physical substance and can be touched.
Literally, tangible means a thing that is perceptible by touch; clear and definite, that which can be touched; material,
‘Supply’ means making available to some one; making available; providing something; action of providing what is needed. The word ‘supply’ is defined in the Standard Dictionary as ‘that which is or can be supplied; available aggregate of things needed or demanded; an amount sufficient for a given use or purpose’. In the Imperial Dictionary, it has been defined as ‘that which is supplied; sufficiency of things for use or want; a quantity of something furnished or on hand’. As used in a contract to purchase all supplies of a certain description for a certain period from a certain firm, the word means all of the specified goods necessary for the purchasers’ business during such period.
The word ‘supply’ in its ordinary natural meaning, conveys the ideal of furnishing or providing to another something which is wanted or required in order to meet the wants or requirements of the other. It connotes more that the mere transfer of physical control of some chattel or object from one person to another. R. v. Maginnis, (1987) 1 AII ER 907, 909.
Section 65(105)(zzzzj) of Finance Act, 1994 defines taxable service in relation to supply of tangible goods as under —
“Any service provided or to be provided to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances”
The service has been made taxable service by Finance Act, 2008 w.e.f. 16.5.2008.
To be a taxable service, the definition envisages the following basic conditions -
(1) Service can be provided by any person to any other person.
(2) Services should be provided in relation to tangible goods.
(3) Tangible goods shall include machinery, equipment and appliances.
(4) The purpose of such supply shall be to use such goods.
(5) Supply of such goods shall be without transferring right of possession and effective control of such goods.
(6) Goods with transfer of possession and control shall be sales and not covered under taxable service.
The objective of supply of tangible goods service is to tax those services which are provided in relation to supply of tangible goods without transferring right of possession and effective control of the subject tangible goods. The movable assets if given on hire would therefore, attract service tax. Thus, lease and hire, both have now come under the service tax net. These would include assets, plant and machinery, other equipments, goods, etc. which could also be vehicles. Chartering of ships, buses, air crafts etc. will also attract service tax. Similarly, companies in manufacturing and exploration sector hire certain equipments, rigs, ships and vessels etc. The transactions in tangible goods shall be of the goods on which VAT has not been charged. The intention is to levy service tax on such transactions which are escaping levy of VAT. Those supply of goods transactions on which VAT is not chargeable, service tax shall be applicable under section 65(105)(zzzzj).
Though clause (zzzzj) uses the word ‘including’ which means that goods also include machinery, equipment and appliances and as such it has wider connotation than just machinery, equipment and appliances, at the end it states’ such machinery, equipment and appliances. Supply of tangible goods only is covered as intangible properties are covered under IPR services.
Transfer of goods may take place from one person to another but should be without transfer of possession or control, say, supply of a crane with operator. Normally such goods require special skills to operate the goods or assets under question. If there is a transfer of possession or control, it would not be covered as taxable service.
The acid test for taxability under this service could be whether VAT is payable on such transfer. If VAT is payable, it is not eligible to service tax under supply of tangible goods services.
Under this category, those transactions which allow another person to use the goods without giving legal right of possession and effective control and are not treated as sale of goods shall be treated as a service and taxed. Whether VAT would be leived or service tax will be levied on the transactions would depend upon whether legal right of possession and effective control rests with the transferor or transferee. This would depend upon facts of each case/ contract and substance, not the form will decide the issue. However, following points should be kept in mind-
- Wherever the right to use movable goods is transferred, it should be treated as a transaction, falling under the scope of sale
- Custody of goods is different from the effective control over or possession of the goods.
- Operation and maintenance of the goods by the transferor during the period for which the right to use such goods is transferred to the transferee does not change the nature of the transaction and make it that of service.
- There may be some transactions involving sale of goods and transfer of right to use goods concurrently and any additional amount over and above the money charged as a part of the sale consideration towards the lease of a part of the goods shall be liable to tax.
- Whether there is a transfer of the right to use the goods or not is essentially a question of fact which has to be determined in each case having regard to the terms of the contract under which there is said to be transfer of the right to use goods or facts of each case.
- Wherever the right to use movable goods is transferred, it shall be treated as a transaction, falling under the definition of sale vide Article 366(29A)(d) of the Constitution of India.
Examples of tangible goods which may be covered -
Offshore construction vessels and barges
Geo technical vessels
Tugs and barge flotillas
High value machinery
Since VAT is a state subject, it is likely that there will be legal issues in this service. State governments would try to levy VAT on such services and service tax shall also be levied. If both taxes are levied, this service may look for some relief. Under various state tax laws, IPR services such as those of patents, trademarks, intangibles etc. are treated as goods and charged to VAT also.
In dry lease arrangements, where assets are leased without personnel and maintenance obligation, VAT is applicable as possession and control also passes from lessor to lessee. However, in case of a wet leases, which are prevalent in oil, gas, aviation and shipping industry, transfer of asset do take place without effective control and possession. Such wet leases do not attract VAT and as such, on such transactions, service tax shall be leviable.
Following table summaries the taxability of supply of tangible goods for service tax purposes —
Levy of VAT/sales tax No
Hire purchase No
Operating lease No
Sale of movable goods No
Hire against rentals Yes
Whether a transaction involves transfer of possession and control is a question to be decided on facts of each case.
In Indian National Ship Owner’s Association v. Union of India 2009 -TMI - 32747 - BOMBAY HIGH COURT it was held that providing vessels on time charter basis without giving effective control was covered under 65(105)(zzzzj) and not under service (zzzy).
Ministry of Finance has vide Circular No. 334/1/2008-TRU dated 29.2.2008 clarified as under —
“Transfer of the right to use any goods is leviable to sales tax/VAT as deemed sale of goods
[Article 366(29A)(d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods.
Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, etc., offshore construction vessels & barges, geo-technical vessels, tug and barge flotillas, rigs and high value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service.
Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT/sales tax as deemed sale of goods, is not covered under the scope of the proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether or not VAT is payable or paid.”
In Re Indian Oil Corporation Ltd. (2010) 19 STR 311 (CCE-Appeal, Nashik), where tax was demanded on license fee which actually represented rent for infrastructural facilities provided to dealers for use of outfit and not for representational rights or display of trade mark and such premises was used for storage and sale of products, it was held that license fee was rent towards use of equipment and such license fee was not covered under franchise service but under supply of tangible goods service.
Exemption to goods carriage supplied to GTA
Exemption for supply of goods carriage to GTA under supply of tangible goods service is available vide Notification No. 29/2008-ST dated 26.6.2008. Accordingly, taxable service of supply of goods carriage without transferring right of possession and effective control of such goods carriage provided by any person to a goods transport agency for use by such GTA to provide any taxable service under clause (105)(zzp) of section 65, to a customer in relation to transportation of goods by road in such carriage supplied shall be fully exempt from levy of service tax .
Renting of Aircrafts
In respect of grant of flying rights of an aircraft to any party against rental charges, the same would be covered under supply of tangible goods as aircraft is a tangible asset. Department has also clarified on this by the Trade Notice No. 42/2008, Service Tax No. 15/2008, dated September 11, 2008, issued by the Central Government. Hindustan Construction Co. Ltd. (‘HCCL’) imported an aircraft and thereafter let the same out on hire basis without transferring right of possession and effective control thereof. By the aforesaid trade notice, dated September 11, 2008, it was made clear that such activity attracted service tax on the hire charges received by HCCL after May 16,2008, as taxable service of supply of tangible goods for use without transferring, right of possession and effective control, under section 65(105)(zzzj). The request of HCCL, to be allowed to take credit of the CVD paid on their aircraft, which was imported prior to May 16, 2008, and utilize it for paying service tax, was also rejected by the said trade notice.
Board’s Clarification vide Letter F. No. 137/120 2008-CX 4 dated 23.10.2008) (Trade Notice No. /2009 dated 13.3.2009 of Madurai Commissioner states as follows-
‘Supply of tangible goods including machinery, equipments and appliance for use, without transferring ring right of possessing and effective control of such tangible goods is a taxable service in terms of provision of section 65(105)(zzzj) of the Finance Act, 1994. In some cases, vehicles, aircraft, vessels etc., are also supplied in the above manner and such activities also fall under the said taxable service. In this regard, a doubt has arisen whether the credit of excise duty/ Additional duty of Customs (commonly known as CVD) paid on such items are available to the provider of such taxable service and if so whether such goods should be considered as ‘input’ or ‘capital goods’, for the purposes of the CENVAT Credit Rules, 2004.
2. The matter has been examined. It is possible that some of such goods may either fall within the definition of ‘capital goods’ or may not be covered under the said definition. However, as these goods are primary requirements for providing the abovementioned ‘output services’ for such service providers, the goods including vehicles, aircrafts, vessels etc., are in the nature of ‘inputs’. It is emphasized here that this clarification is valid only when the output service is in the nature of service defined under the provisions of sections of section 65(105)(zzzj) of the Finance Act, 1994 and the goods in question are the tangible goods supplied during the course of providing the taxable service’.
CBEC has clarified vide Letter No 20/COMM (ST) / 2009 dated 9.2.2009 that non-scheduled operators engaged in the business of giving right to use the aircraft to its customers (chartering of aircraft) are liable to pay service tax if effective control is also transferred.
Chartering of aircrafts by client only confers him with the right to use the aircraft and the owner in such cases does not transfer the right of possession. Effective control over the aircraft is transferred on not has to be determined on facts in each case. Where the crew in also provided by the aircraft owners as in case of a wet lease, effective control is not transferred.
Export and import of supply of tangible goods service (w.e.f. 16.5.2008)
In case of taxable services in relation to supply of tangible goods, export and import of services shall be determined on the basis of location of the subject goods in India and outside India during the period of use by the recipient of service.
Exemption to exporter using supply of tangible goods service (w.e.f. 16.5.2008)
Supply of tangible goods as specified in Notification No. 24/2008-ST dated 10.5.2008 have been exempted (refund allowed) in case of exporters under Notification No. 41/2007-ST dated 6.10.2007. Accordingly, following supply of tangible goods service received by an exporter and used for export of goods shall be exempt from levy of service tax subject to certain conditions and claim of refund as per prescribed procedure —
“Service of supply of tangible goods for use, without transferring right of possession and effective control of tangible goods, provided to an exporter in relation to goods exported by the exporter”.
For claiming exemption, exporter will have to comply with the condition to produce evidence to prove that the services specified are used in relation to export of goods.
Notification No. 41/2007 has since been superseded by Notification No. 17/2009-ST dated 7.7.2009 and services of supply of tangible goods for use, without transferring right of possession and effective control of tangible goods, provided to an exporter in relation to goods exported by the exporter shall continue to be a available exemption
(i) Exemption for supply of goods carriage to GTA under supply of tangible goods service is available vide Notification No. 29/2008-ST dated 26.6.2008.
(ii) Supply of goods services provided by any person to a goods transport agency for use by a GTA to provide GTA services shall be exempt from levy of service tax vide Notification No. 1/2009-ST dated 5.1.2009.
Any supply of tangible goods services providing taxable services or activities to any other person shall be liable to pay service tax and shall be treated as an assessee for service tax purposes. However, in case of import of service, recipient of service shall be liable to pay service tax on reverse charge basis.