2025 (4) TMI 957 - AT - Service Tax

Nature of transaction - supply of tangible goods service or deemed sale - activity of hiring out equipment by the appellant - HELD THAT - In the present case it is not disputed that the present proceedings have been initiated on account of periodical Show Cause Notice issued for the period April 2009 to September 2012. The facts are identical and appellant has provided documentary evidence to the effect that VAT has been paid by them. Therefore the impugned order is legally not sustainable. Appeal allowed.

Summary

The core legal questions considered by the Tribunal in this appeal are as follows:

1. Whether the activity of hiring out equipment by the appellant amounts to a "supply of tangible goods service" liable to service tax, or whether it constitutes a "deemed sale" under the applicable VAT laws, thereby excluding it from service tax liability.

2. Whether the pre-deposit condition under amended Section 35F of the Finance Act, 1994, requiring 7.5% pre-deposit of the litigated amount for pursuing the appeal before the Commissioner (Appeals), was correctly applied by the Commissioner (Appeals) in dismissing the appellant's appeal.

3. Whether the Tribunal should remand the matter to the Commissioner (Appeals) for fresh consideration or decide the appeal on merits in light of prior decisions on identical issues.

Issue 1: Classification of Hiring Activity - Service Tax Liability vs. VAT

Relevant legal framework and precedents: The primary legal framework involves the service tax provisions relating to "supply of tangible goods service" and the VAT provisions under the Assam Sales Tax Act, which treats hiring of goods as a deemed sale attracting VAT. The Tribunal relied heavily on Board Circular No. 334/1/2008 TRU dated 29.2.2008, which clarifies that if VAT is payable or paid on a transaction, such transaction is excluded from the scope of service tax on supply of tangible goods for use. The constitutional provision Article 366(29A)(d) defining "deemed sale" was also referenced.

Precedents include the Tribunal's own Final Order No. 77166/2024 dated 11/09/2024 involving the appellant's identical issue for the period July 2008 to March 2009, and judicial decisions such as the Gimmco Ltd case and the High Court of Andhra Pradesh decision in the G.S. Lamba case, which elucidate the principles governing transfer of right to use goods and the distinction between service and deemed sale.

Court's interpretation and reasoning: The Tribunal examined the terms of the agreements between the appellant and the hirers, noting that effective control and possession of the equipment were transferred to the hirers. The appellant did not retain rights such as supplying manpower or operating the equipment, and the hirers bore the risk of loss or damage. These facts indicated a transfer of the right to use the goods rather than a mere service of supply of tangible goods.

The Tribunal emphasized the Board Circular's clarification that transactions on which VAT is payable or paid are excluded from service tax. It observed that the appellant had discharged VAT on the hiring transactions, confirming the applicability of VAT and exclusion from service tax.

The Tribunal further analyzed the Gimmco Ltd case, highlighting that restrictions on use or maintenance obligations do not negate the transfer of right to use. The High Court's criteria for transfer of right to use were applied, confirming that the lessee's exclusive right to use the goods, control over use, and responsibility for permits and licenses signify a deemed sale under VAT laws rather than a service liable to service tax.

Key evidence and findings: The appellant submitted copies of agreements showing transfer of effective control, absence of retained rights by the appellant, and proof of VAT payment on the hiring transactions. The Tribunal found these facts consistent with the transfer of right to use goods.

Application of law to facts: Applying the legal principles and precedents, the Tribunal concluded that the appellant's hiring activity constituted a deemed sale under VAT and not a service taxable under service tax law.

Treatment of competing arguments: The Revenue's contention that the service tax was applicable was rejected on the ground that the effective control test and VAT payment excluded the transaction from service tax. The appellant's reliance on the Board Circular and prior Tribunal decisions was accepted as determinative.

Conclusion: The Tribunal held that the appellant's activity of hiring out equipment did not attract service tax as "supply of tangible goods for use" service, since VAT was paid, and the transaction was a deemed sale under VAT laws.

Issue 2: Pre-deposit Requirement under Section 35F and Its Application

Relevant legal framework: Section 35F of the Finance Act, 1994, as amended effective 06/08/2014, requires a pre-deposit of 7.5% of the litigated amount for pursuing an appeal before the Commissioner (Appeals). Prior to amendment, the pre-deposit requirement was different.

Court's interpretation and reasoning: The Commissioner (Appeals) had directed a pre-deposit of the full amount (Rs. 19,84,415/-) in November 2014, after the amendment date. The appellant requested modification of the pre-deposit amount in accordance with the amended provisions, but the Commissioner (Appeals) did not consider this request and dismissed the appeal for non-fulfillment of the pre-deposit condition.

The Tribunal observed that since the stay petition was taken up after the amendment date, the Commissioner (Appeals) was required to apply the amended provisions. The failure to consider the modification request was a procedural lapse.

Key evidence and findings: The timeline of the stay petition and amendment of Section 35F was crucial. The appellant's modification application was on record but ignored by the Commissioner (Appeals).

Application of law to facts: The Tribunal found that the Commissioner (Appeals) erred in not applying the amended pre-deposit provisions and ignoring the appellant's request.

Treatment of competing arguments: The Revenue did not dispute the procedural lapse but argued that the appeal should be remanded.

Conclusion: The Tribunal held that the Commissioner (Appeals) failed to consider the correct pre-deposit amount under the amended Section 35F and thus the dismissal of the appeal on this ground was not sustainable.

Issue 3: Whether to Remand or Decide on Merits

Court's reasoning: The appellant urged the Tribunal to decide the appeal on merits to avoid further delay, pointing out that the issue had been adjudicated by the Tribunal in their own case for an earlier period and the facts for the present period were identical.

The Revenue suggested remand to the Commissioner (Appeals) since the appeal was dismissed for non-fulfillment of pre-deposit condition without deciding on merits.

The Tribunal noted that the issue was no longer res-integra and was squarely covered by its prior decision. Given the long delay and identical facts, the Tribunal exercised its discretion to decide the appeal on merits rather than remand.

Conclusion: The Tribunal chose to dispose of the appeal on merits, allowing the appeal and setting aside the impugned order.

Significant holdings and core principles:

"The present confirmed demand legally does not sustain" where effective control and possession are transferred to the hirer and VAT is paid on the transaction.

"If VAT is payable on the transaction, then service tax levy is not attracted."

"The transaction involved herein is 'transfer of right to use' which is a deemed sale and not 'supply of tangible goods for use' service."

"The Commissioner (Appeals) was required to go through the relevant provisions applicable at the relevant period and consider modification request for pre-deposit in terms of amended Section 35F."

"In the interest of justice, the Tribunal may take up the appeal for disposal and pass the final order without remanding the matter to avoid further delay."

Final determinations:

1. The appellant's hiring out of equipment is a deemed sale under VAT laws and not liable to service tax under "supply of tangible goods for use" service.

2. The impugned order dismissing the appeal for non-fulfillment of pre-deposit condition under amended Section 35F is set aside due to procedural lapse.

3. The appeal is allowed on merits with consequential relief, and the matter is disposed of without remand.