The Ahmedabad Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has set aside a service tax demand against Universal Distributors, holding that providing trucks fitted with hydrogen cylinder skids on a per-trip charging basis cannot be classified as a “supply of tangible goods service.”

The Bench of Somesh Arora (Judicial Member) and Satendra Vikram Singh (Technical Member) observed that charging separately for each trip was indicative of a transportation activity rather than the renting of vehicles. It also took note of an earlier adjudication order in which the department had found that the assessee was not liable to pay service tax even under the Goods Transport Agency (GTA) category.

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The appellant/assessee provided trucks fitted with hydrogen cylinder skids to M/s Raj & Company under a memorandum of understanding.

Under the arrangement, a rent of ₹2,500 per trip was charged for trucks having capacities of 1,486 NM3 and 1,415 NM3. Trucks with a capacity of 1,801 NM3 attracted a charge of ₹4,000 per trip. Skid rent was charged at ₹4 per NM3 for up to six trips and ₹4.50 per NM3 from the seventh trip onwards.

During an audit, Central Excise officers alleged that the appellant was recovering rent for trucks fitted with hydrogen cylinder skids and that the activity was taxable under the category of “supply of tangible goods service.”

The department also alleged that Universal Distributors had not obtained service tax registration, paid the applicable service tax or filed ST-3 returns for the disputed activity.

The department issued four show cause notices covering earlier periods. A further show cause notice was issued for the period from October 2016 to June 2017, proposing a service tax demand of ₹8,44,162.

The notice also sought interest under Section 75 of the Finance Act, 1994, penalties under Sections 76 and 77(1)(a), and a late fee under Rule 7C of the Service Tax Rules, 1994 read with Section 70 of the Finance Act.

The Assistant Commissioner confirmed the service tax demand of ₹8,44,162 through an order dated September 26, 2019. Interest was also ordered to be recovered.

A penalty of ₹84,416 was imposed under Section 76, while another penalty of ₹10,000 was imposed under Section 77(1)(a). An additional penalty of ₹20,000 was imposed under Section 70 read with Rule 7C of the Service Tax Rules.

The Commissioner (Appeals) subsequently rejected the assessee’s appeal and upheld the adjudication order.

The appellate authority concluded that the transaction did not involve a transfer of the right to use the trucks fitted with hydrogen cylinder skids because the vehicles were required to be handed back to the appellant after the termination of the agreement.

Universal Distributors contended before CESTAT that the entire vehicle fitted with a cylinder skid was handed over to the customer.

According to the appellant, the customer used and maintained the vehicles at its own responsibility during the rental period. All expenses connected with the operation of the vehicles were borne by M/s Raj & Company.

The customer was responsible for arranging its own staff, drivers and cleaners and for bearing expenses relating to diesel, tyres, batteries and the maintenance of the vehicles.

The appellant argued that “supply of tangible goods service” under Section 65(105)(zzzzj) of the Finance Act, 1994 applied only where the right of possession and effective control over the tangible goods remained with the owner.

Since possession and effective control of the trucks had been transferred to the customer, the transaction did not satisfy the statutory conditions governing the taxable service, the appellant submitted.

Reliance was also placed on the decision of the Mumbai Bench of CESTAT in Kinetic Communications Ltd. v. CCE, Pune-I.

During the hearing, the appellant informed the Tribunal that the four show cause notices issued for earlier periods involved the same dispute.

Those proceedings had earlier reached CESTAT and were remanded to the adjudicating authority through orders passed in October 2023, April 2024 and August 2024.

In its October 2023 order, the Tribunal had observed that the appellant was charging Raj & Company on a per-trip basis for providing the vehicles.

The Tribunal had prima facie found that this mode of charging pointed towards a transportation service rather than the renting of vehicles. It reasoned that, in a typical renting transaction, a fixed amount would ordinarily be charged monthly or as a lump sum. A charge calculated on the basis of individual trips instead indicated transportation.

However, since neither the department nor the assessee had raised the issue of classification under GTA service at that stage, CESTAT remanded the earlier matters for examining whether the activity could fall under GTA service and whether any service tax liability would consequently arise.

Pursuant to the remand directions, the Additional Commissioner reconsidered the dispute and passed an order on September 25, 2025.

The adjudicating authority held that Universal Distributors did not satisfy the criteria for being treated as a Goods Transport Agency. It noted that CESTAT had already found that the assessee was not providing a supply of tangible goods service.

The authority held that Universal Distributors could, at best, be classified as a provider of a means of transport to a GTA. Such services were exempt from service tax under Serial No. 22 of the applicable exemption notifications.

Accordingly, the service tax demand for the earlier periods dropped.

The departmental representative informed CESTAT that the remand order passed by the Additional Commissioner had been accepted by the department on monetary grounds.

Considering the earlier proceedings, CESTAT held that the issue was no longer res integra.

The Tribunal observed that it had already examined the nature of the arrangement and found that providing vehicles fitted with hydrogen cylinder skids on a per-trip basis was not classifiable as a supply of tangible goods service.

The adjudicating authority had also examined the alternative classification under GTA service and concluded that the appellant was not liable to pay service tax under that category.

Following its earlier decisions on the identical issue, CESTAT set aside the service tax demand confirmed against Universal Distributors under the category of supply of tangible goods service.

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