The Kolkata Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand of ₹2.10 crore along with an equal penalty imposed on equipment manufacturer and supplier assessee Ltd., holding that the hiring of heavy earthmoving equipment amounted to a “transfer of the right to use goods” and therefore constituted a deemed sale liable to VAT/CST rather than service tax.
The Bench of Justice Ashok Jindal (Judicial Member) and K. Anpazhakan (Technical Member) has ruled that the company was not liable to pay service tax under the category of “Supply of Tangible Goods Service.”
The appellant/assessee is engaged in the manufacture and trading of earthmoving and construction equipment, had entered into agreements with customers for renting out such machinery for specified periods. Under these arrangements, the equipment was deployed at customer sites, while ownership remained with assessee. However, possession, custody and operational control were handed over to the customers.
The company treated these transactions as “deemed sales” involving transfer of the right to use goods and accordingly discharged VAT/CST liability on the rental receipts.
The Service Tax Department, however, issued a show cause notice alleging that the transactions were taxable as “Supply of Tangible Goods Service” under Section 65(105)(zzzzj) of the Finance Act, 1994, and subsequently confirmed a service tax demand of ₹2,10,17,326 along with an equivalent penalty under Section 78.
The Department argued that the assessee had retained effective control over the rented machinery and that the customers merely used the equipment under the company’s supervision. It further contended that legal consequences arising from accidents, injuries or deaths connected with operation of the equipment remained with assessee and therefore the transactions could not be treated as deemed sales.
Based on these findings, the adjudicating authority concluded that the transactions were taxable services and confirmed the demand.
Before the Tribunal, assessee relied upon the terms of its rental agreements to demonstrate that possession, custody and effective control of the equipment were transferred to customers during the contract period. The agreements specifically provided that the equipment would remain under the customer’s possession, control and custody during the tenure of the agreement. Customers were liable for taxes such as VAT/CST. Assessee could not withdraw or use the equipment elsewhere during the contract period. Customers supervised and controlled the operation of the machinery. Customers could even operate the equipment through their own trained operators.
The company further pointed out that VAT/CST had been paid on these transactions and furnished a Chartered Accountant’s certificate certifying payment of applicable taxes.
The Tribunal examined the constitutional concept of “transfer of the right to use goods” introduced through Article 366(29A)(d) and referred to the Supreme Court’s landmark judgment in BSNL v. Union of India, which laid down five attributes necessary for a transaction to qualify as a transfer of the right to use goods.
The Bench noted that The equipment was identified and delivered to customers. Customers had the legal right to use the machinery. Possession and effective control vested with customers. Assessee could not use or reassign the equipment during the rental period. The same equipment could not simultaneously be transferred to another party.
Accordingly, all attributes of a transfer of the right to use goods stood satisfied.
The department relied upon the Supreme Court’s ruling in K.P. Mozika v. ONGC concerning transportation contracts involving vehicles and trailers. However, the Tribunal distinguished the judgment on facts.
The Bench observed that in K.P. Mozika, the contractor retained full control over the vehicles and manpower throughout the contract period, whereas in assessee’s case the agreements clearly transferred possession and effective control of the equipment to customers. Therefore, the Supreme Court decision was held inapplicable.
The Tribunal heavily relied on its earlier decision in Gainwell Commosales v. Commissioner of Service Tax, Kolkata, where similar equipment rental arrangements had been held to constitute deemed sales attracting VAT rather than service tax. The Bench also noted that the Calcutta High Court had affirmed the principle that equipment rentals involving transfer of possession and effective control are not taxable under the “Supply of Tangible Goods” service category.
The Tribunal further referred to decisions in Computer Exchange Pvt. Ltd., Oil India Ltd., Inox Air Products Pvt. Ltd., Express Engineers & Spares, and Gimmco Ltd. supporting the same proposition.
A significant aspect of the ruling was the Tribunal’s reaffirmation that VAT and service tax are mutually exclusive levies. The Bench observed that where VAT has been paid on a transaction that qualifies as a transfer of the right to use goods, the same transaction cannot simultaneously be subjected to service tax.
The Tribunal noted that the assessee had undisputedly discharged VAT/CST on the equipment rental transactions and had furnished documentary evidence in support.
Concluding that the agreements resulted in transfer of possession and effective control of the equipment to customers and therefore constituted a deemed sale, the Tribunal held that no service tax liability could arise under the “Supply of Tangible Goods Service” category. It accordingly set aside the entire demand of ₹2.10 crore and the corresponding penalty.
Allowing the appeal, the Bench ordered consequential relief in favour of assessee.
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