2018 (2) TMI 1415 - AT - Service Tax

Levy of sales tax/VAT or service tax? - Hire Agreement - appellants had entered into Hire Agreement with parties for supply of Diesel Generators - Department took the view that the said services rendered by appellants to their customers i.e. supply of diesel generators are classifiable under the category of supply of tangible goods and that appellants are liable for payment of service tax on the consideration received for such services from 16-05-2008 onwards - whether the transaction entered into by the appellants with the hirers of DG sets would be in the nature of a transaction involving transfer of possession and control of goods to the users or is only one that allows the other users to use the goods without giving legal right of possession and effective control? Held that - both before and after 01-07-2012, it can be reasonably concluded that supply of tangible goods inter-alia with the right to use then for any purpose and which transaction is deemed as a sale will attract only sales tax levy. However, where such supply does not extend to transfer of possession and effective control of overall goods, such a transaction would not become a deemed sale but a service. This is exactly what CBEC had clarified in their circular No.334/1/2012-TRU, dated 16.03.2012. The agreements only set out the terms of the hire and in no way put any shackles on the hirer for full enjoyment of the DG set hired by the hirers or for that matter, bring about less than complete transfer of possession and control. It is also noteworthy that the hirer pays hire charges and not service charges . We also find merit in the appellant s contention that the deposit amount is also paid by the hirers, which is the practice only in cases of leasing contracts which are deemed sale transactions and not the cases where only service is provided or received - It is also not the case of the department that the appellants are not discharging sales tax/VAT on the transactions. In fact the impugned order concedes that appellants have already paid VAT under APVAT Act on the entire hiring charges. Further, the adjudicating authority has refrained from imposing penalty under the Finance Act, 1994 on the grounds that appellants were paying VAT under the APVAT Act on the very same transaction. The impugned transaction involving supply of DG sets on hire basis to various hirers is nothing but supply of tangible goods with transfer of both possession and control of the goods to the users of the goods. These transactions have been ruled as deemed sale of goods for the purpose of APVAT Act by the concerned Advance Ruling Authority. Appellants have also been discharging VAT on the hire charges under APVAT Act. Hence, this is the case of supply of tangible goods for use, with legal right of possession and effective control vesting with the hirer, required to be treated as deemed sale of goods , hence cannot be considered as supply of tangible goods for use of service for the purposes of Section 65(105) (zzzz) of the Finance Act, 1994 for the period upto 01-07-2012 or as taxable service for the purpose of Section 65B (44) of the Finance Act, 1994 after 01-07-2012. Reliance placed in the case of BHARAT SANCHAR NIGAM LTD. (BSNL) Versus UNION OF INDIA 2006 (3) TMI 1 - Supreme court . Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Classification of services provided by the appellants.
2. Applicability of service tax on transactions involving supply of diesel generators.
3. Determination of whether the transactions constitute a "deemed sale" or "supply of tangible goods for use" service.
4. Analysis of the nature of possession and control in the transactions.
5. Applicability of VAT on the transactions.

Detailed Analysis:

1. Classification of Services Provided by the Appellants:
The appellants, M/s Power Mak Industries (PMI) and Power Mak Pvt. Ltd (PMPL), were registered under service tax for various services. The dispute arose regarding the classification of their transactions involving the supply of diesel generators on hire basis. The department contended that these transactions should be classified under "supply of tangible goods" and subjected to service tax.

2. Applicability of Service Tax on Transactions Involving Supply of Diesel Generators:
The department issued multiple show cause notices to PMI and PMPL, demanding service tax on the consideration received for the supply of diesel generators from 16-05-2008 onwards. The adjudicating authority confirmed the service tax demands but restricted the amounts and waived the proposed penalties.

3. Determination of Whether the Transactions Constitute a "Deemed Sale" or "Supply of Tangible Goods for Use" Service:
The core issue was whether the transactions involved a transfer of possession and control of the diesel generators to the hirers, constituting a "deemed sale" subject to VAT, or if they were merely a "supply of tangible goods for use" service, attracting service tax. The appellants argued that the transactions were deemed sales, as they transferred both possession and control to the hirers, who used the generators exclusively during the contract period. They supported their argument with case laws and an advance ruling from the APVAT Act, which classified the transactions as deemed sales.

4. Analysis of the Nature of Possession and Control in the Transactions:
The Tribunal examined the agreements between the appellants and the hirers, noting clauses that indicated the hirers had exclusive control and possession of the generators. The agreements specified that the generators were the property of the appellants, but the hirers had exclusive use during the contract period, with conditions for safety and maintenance. The Tribunal found that the hirers had legal right to use the generators, and the appellants did not retain effective control, countering the department's argument that the presence of technicians indicated retained control by the appellants.

5. Applicability of VAT on the Transactions:
The Tribunal noted that the appellants were paying VAT on the transactions under the APVAT Act, as confirmed by the advance ruling authority. The Tribunal concluded that the transactions were deemed sales, as they involved the transfer of possession and control to the hirers, and thus were not subject to service tax under the Finance Act, 1994.

Conclusion:
The Tribunal set aside the impugned orders, concluding that the transactions were deemed sales subject to VAT and not "supply of tangible goods for use" services subject to service tax. Both appeals were allowed with consequential benefits as per law.

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