The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chandigarh, has held that leasing of machinery involving transfer of possession and effective control does not attract service tax under the category of “Supply of Tangible Goods Service.”
The bench of Justice S.S. Garg (Member Judicial) and P. Anjani Kumar (Member Technical) ruled that such transactions constitute transfer of the right to use goods, on which VAT had already been paid, and therefore fall outside the scope of service tax.
The appellants/assessees had entered into lease agreements under which various industrial machineries were rented out to lessees. Under the agreements, the machinery was physically shifted to the lessee’s premises, while ownership remained with the lessor. The lessees were responsible for maintenance, repairs, insurance, taxes, and indemnifying the lessor against loss or third-party claims. The machinery could be used exclusively by the lessee during the lease period and could not be sub-let.
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The department viewed these arrangements as taxable under the category of “Right to Use Tangible Goods Service”under Section 65(105)(zzzzj) of the Finance Act, 1994, alleging that effective possession and control had not been transferred. Accordingly, show cause notices were issued invoking the extended period of limitation, demanding service tax along with interest and penalties on the ground that the assessees had suppressed material facts regarding these transactions.
Although the adjudicating authority and the Commissioner (Appeals) confirmed the demands, the assessees challenged the orders before the Tribunal.
The appellants argued that the essential ingredient for levy of service tax under “Supply of Tangible Goods Service” is the absence of transfer of possession and effective control. According to them, the lease agreements clearly demonstrated that the machinery remained under the exclusive possession and operational control of the lessee throughout the lease period.
They further contended that the transactions amounted to transfer of the right to use goods, constituting a deemed sale under the Constitution and attracting VAT, which had already been discharged. Consequently, the same transaction could not simultaneously be subjected to service tax. The appellants relied heavily on the Supreme Court’s landmark judgment in Bharat Sanchar Nigam Ltd. v. Union of India and several Tribunal decisions, including Eastman Impex, MSPL Ltd., and Universal Power Transformers Pvt. Ltd., all of which had recognized that transfer of possession and effective control excludes levy of service tax.
The appellants also argued that invocation of the extended limitation period was unsustainable because they had acted under a bona fide belief, supported by settled judicial precedents, and had duly paid VAT on the transactions.
The department maintained that certain clauses of the lease agreements relating to repairs, loss, damage, and insurance indicated that complete possession and effective control had not been transferred to the lessees. It argued that the arrangements merely involved permitting use of machinery and therefore squarely fell within the taxable category of supply of tangible goods for use without transfer of possession and effective control.
After examining the lease agreements, the Tribunal rejected the department’s interpretation.
The Bench observed that the machinery had been installed at the lessees’ premises for the agreed lease period and that the lessees enjoyed exclusive rights to use the equipment without interference from the lessor. During the currency of the lease, the lessor could neither use the machinery nor lease it to any other person.
The Tribunal held that the agreements satisfied the tests laid down by the Supreme Court in Bharat Sanchar Nigam Ltd., namely identifiable goods were available for delivery; there was consensus regarding the goods transferred; the lessee obtained the legal right to use the goods; such right excluded even the owner during the lease period; and the lessor could not transfer the same rights to any other person during the subsistence of the lease.
The Bench further noted that the appellants had discharged VAT on the transactions, treating them as deemed sales, reinforcing the conclusion that the arrangements involved transfer of the right to use goods rather than provision of taxable services.
The Tribunal relied extensively on its earlier decisions, particularly Eastman Impex, MSPL Ltd., and Universal Power Transformers Pvt. Ltd., where similar leasing arrangements had been held to be outside the ambit of service tax because possession and effective control stood transferred to the lessee.
The Bench also noted that the Supreme Court had already dismissed the Revenue’s appeal against the Tribunal’s decision in MSPL Ltd., thereby lending finality to the legal position that transactions involving transfer of possession and effective control are not taxable as supply of tangible goods services.
Holding that the controversy was squarely covered by binding judicial precedents, the Tribunal concluded that the impugned orders confirming service tax demands were legally unsustainable.
Accordingly, CESTAT allowed all three appeals, set aside the service tax demands, interest, and consequential liabilities, and granted consequential relief to the appellants in accordance with law.
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