2024 (10) TMI 1653 - AT - Service Tax

Classification of leasing transactions for tax purposes - whether the supply of machinery or equipment on lease constitutes a supply of tangible goods for use service liable to service tax or a transfer of right to use goods ? - HELD THAT - An identical issue in the same set of facts in the appellant s own case has been decided by this Tribunal AMOL DICALITE LTD. 2024 (9) TMI 1727 - CESTAT AHMEDABAD wherein this Tribunal has held that the assessee s activity of giving various equipments on hire does not fall under the category of Supply of tangible goods for use hence the same is not liable to service tax w.e.f. 16-5-2008. The issue is no longer res-integra. Accordingly the impugned orders are set aside and appeals are allowed in favour of the appellant.

Summary

The core legal questions considered in this judgment revolve around the classification of leasing transactions for tax purposes, specifically whether the supply of machinery or equipment on lease constitutes a "supply of tangible goods for use" service liable to service tax or a "transfer of right to use goods" amounting to a deemed sale liable to VAT under Article 366(29A)(d) of the Constitution of India. The key issues include:

1. Whether the leasing of machinery under the agreements in question amounts to a taxable service under the category of "supply of tangible goods for use" as defined in Section 65(105)(zzzzj) of the Finance Act, 1994.

2. Whether the right to possession and effective control of the leased machinery remains with the lessor or is transferred to the lessee, which is determinative of the taxability under service tax or VAT.

3. The interpretation and application of Article 366(29A)(d) of the Constitution of India, which defines deemed sale to include transfer of the right to use goods for any purpose.

4. The relevance and effect of the terms of the lease agreements and related contracts in determining the nature of the transaction.

5. The applicability of various judicial precedents and principles of contract interpretation to ascertain the intention of the parties and the true nature of the transaction.

Issue-wise Detailed Analysis

Issue 1: Classification of Leasing Transactions as Service or Deemed Sale

The legal framework includes Section 65(105)(zzzzj) of the Finance Act, 1994, defining "taxable service" in relation to supply of tangible goods for use as a service provided without transferring right of possession and effective control. Article 366(29A)(d) of the Constitution of India defines "tax on sale or purchase of goods" to include tax on the transfer of the right to use goods for any purpose, deeming such transfer a sale.

The Court examined the lease agreements, focusing on whether the lessee obtained the right to possession and effective control of the machinery. The plain reading of the agreements, including covenants requiring the lessee to maintain, repair, and use the machinery for their industrial purposes, indicated that the right to possession and effective control was transferred to the lessee.

Precedents from this Tribunal and various High Courts and Supreme Court decisions were analyzed. The Tribunal's own earlier decision in the appellant's case (Final Order No. 12197-12199/2024) was cited, where under identical facts, it was held that the transaction was a deemed sale and not a taxable service.

Thus, the Court concluded that leasing with transfer of possession and effective control is not a "supply of tangible goods for use" service but a deemed sale liable to VAT.

Issue 2: Interpretation of Lease Agreements and Transfer of Possession and Control

The Court emphasized that to determine whether the transaction is a service or deemed sale, the terms of the lease agreement must be examined as a whole. The Court applied established principles of contract interpretation, including construing the document as a whole, giving literal meaning to words, and prioritizing the intention of parties over isolated clauses.

Extracts from the lease agreements demonstrated that the lessee had exclusive possession and effective control, was responsible for maintenance and repair, and used the machinery for their business purposes. The lessor retained ownership but did not retain possession or control during the lease term.

These factors satisfied the requirements for transfer of right to use goods under Article 366(29A)(d), thereby constituting deemed sale.

Issue 3: Application of Article 366(29A)(d) and Judicial Precedents

The Court undertook a detailed review of the constitutional provision and judicial interpretations. Article 366(29A)(d) was enacted to broaden the scope of state sales tax to include transactions involving transfer of the right to use goods, even if ownership is not transferred.

Key Supreme Court decisions such as Builders Association of India v. Union of India, Rashtriya Ispat Nigam Ltd. v. CTO, and Bharat Sanchar Nigam Ltd. v. Union of India were discussed. These cases established that the taxable event is the transfer of the right to use goods, not necessarily the delivery or physical possession at the time of contract execution.

The Court noted that effective control by the lessee, exclusive use rights, and responsibility for permits and licenses are indicators of transfer of right to use goods.

Further, the Court distinguished between contracts for service (e.g., transportation) and contracts for transfer of right to use goods, relying on the intention of the parties and the terms of the agreement.

Issue 4: Treatment of Competing Arguments

The Revenue argued that the lessor retained effective control and that the transaction was a service taxable under supply of tangible goods for use. The Court rejected this contention, holding that mere restrictions or conditions in the agreement do not negate the transfer of possession and control if the lessee has exclusive use and responsibility.

The Revenue's challenge to the authenticity of the agreement due to absence of date and place of execution was also rejected. The Court held that absence of such formalities does not invalidate the contract if the rights and obligations are clearly established and supported by correspondence and conduct of parties.

Issue 5: Effect of VAT Payment and Non-Liability to Service Tax

The Court noted that the appellant had paid VAT on the transactions, reinforcing the classification as deemed sale. It was held that where VAT is payable on transfer of right to use goods, service tax under supply of tangible goods for use service cannot be levied on the same transaction to avoid double taxation.

Precedents including the decision of the Supreme Court upholding the non-applicability of service tax where VAT is paid were relied upon.

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 levy of tax under Article 366(29A)(d) is not on the use of goods. It is on the transfer of the right to use goods which accrues only on account of the transfer of the right. In other words, the right to use goods arises only on the transfer of such right and unless there is transfer of right, the right to use does not arise."

"Whether the 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."

"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."

Core Principles Established

1. Leasing transactions where the lessee obtains right to possession and effective control of tangible goods amount to transfer of right to use goods, constituting deemed sale liable to VAT under Article 366(29A)(d).

2. Supply of tangible goods for use service under service tax applies only where the lessor retains possession and effective control.

3. The true nature of the transaction is to be determined by construing the entire agreement and the intention of the parties, not by isolated clauses.

4. Payment of VAT on such transactions precludes levy of service tax on the same transaction to avoid double taxation.

5. Absence of formalities such as date and place of execution in an agreement does not invalidate the contract if the rights and obligations are clearly established.

Final Determinations

The Tribunal set aside the impugned orders confirming service tax demand under supply of tangible goods for use service and allowed the appeals filed by the appellant. The demand of service tax was held unsustainable on the ground that the transactions constituted deemed sale with transfer of right to use goods, attracting VAT and not service tax. The appeal filed by the Revenue was dismissed. The issue was held to be no longer res-integra in light of the Tribunal's earlier decision and the consistent judicial precedents.