2019 (8) TMI 427 - AT - Service Tax

Nature of activity - service or sale - supply of Tangible Goods services or not - effective possession and control - cum-tax benefit - providing work-wear solution to the various industrial customers in terms of various agreements where there is transfer of effective control to the client - whether the transaction entered into between the appellant and the customer is transferring the right to use by the appellant or allowing the customer to use the work-wear? HELD THAT - The agreement has the terms conditions with the customers for the lease the work-wear from the appellant and the appellant owns the lease product, will have exclusive right to wash the work-wear and also the Noticee shall have exclusive right to serve the work-wear - It is necessary to have transfer of right to use involving both transfer of possession and also effective control of the goods by the user of the goods. The transaction for allowing another person to use the goods without giving legal right of possession cannot be treated as deemed sale of the goods, and thus has to be treated as service only. It is also the contention of the Department that after introduction of the negative list based tax regime, the activity of the supply of goods without transfer of right liable to tax by virtue of Section 66E (f) of Finance Act. The similar issue come up for consideration before this Hon ble Tribunal in case of M/S. GIMMCO LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE SERVICE TAX, NAGPUR (VICE-VERSA) 2016 (12) TMI 394 - CESTAT MUMBAI . The issue involved in that case was regarding the renting of earth moving equipments to various Customers by the M/s Gimmco Limited and based on the clauses in the agreement, there was restriction of use by the lessee as skilled workers to operate the equipment was being provided by the lessor and maintenance and repair of the equipments were also by the lessor and it has been held that there is no service involved in this case. It is evidently clear that the some of the activities of regarding the maintenance and washing of work-wear rented to the clients, by the appellants will not mean that effect control as been retained by the appellant - in the instant case, in terms of agreement work-wear rented out always remains within the exclusive possession of their clients and nobody else can use the those workwear at the same time and hence effective control to lie with the user/ clients. The appellant, therefore, does not have control over the use of the work-wear. Thus the activity is not in the nature of service under the Finance Act in both during the period prior to negative list regime and thereafter as held in the impugned order. Appeal allowed - decided in favor of appellant.

Issues Involved:
1. Classification of the service provided by the appellant.
2. Transfer of effective control and deemed sale.
3. Applicability of service tax under the Finance Act, 1994.
4. Invocation of the extended period for demand.
5. Imposition of penalties.

Issue-wise Detailed Analysis:

1. Classification of the service provided by the appellant:
The core issue was whether the service of leasing work-wear to clients by the appellant falls under the category of "supply of tangible goods" as per Section 65(105)(zzzzj) of the Finance Act, 1994 before 01/07/2012, and under Section 65B(44) read with Section 66E(f) post-01/07/2012. The Commissioner concluded that the appellant’s activity involved supplying tangible goods without transferring effective control, thus qualifying as a taxable service. The appellant argued that their service constituted a transfer of the right to use the goods, thus amounting to a deemed sale and not a service.

2. Transfer of effective control and deemed sale:
The Commissioner reasoned that for a transaction to be considered a deemed sale, both possession and control must be transferred to the customer. The Commissioner relied on the Supreme Court's decision in Bharat Sanchar Nigam Ltd. vs. UOI, which outlined attributes necessary for a transaction to qualify as a transfer of the right to use goods. The Commissioner held that since the appellant retained the right to wash and maintain the work-wear, effective control was not transferred to the customer, thus not constituting a deemed sale. The appellant contended that they fulfilled all the conditions laid down in the BSNL case, including the transfer of effective control to the customer during the lease period.

3. Applicability of service tax under the Finance Act, 1994:
The Commissioner held that the appellant's activity was taxable as a service both before and after the introduction of the negative list regime. The appellant argued that their transaction was a deemed sale under Article 366(29A)(d) of the Constitution, supported by the payment of VAT on the transactions, which indicated a sale rather than a service. The Tribunal found merit in the appellant's argument, agreeing that the retention of the right to wash and maintain the work-wear did not imply retention of effective control, thus supporting the appellant's claim of deemed sale.

4. Invocation of the extended period for demand:
The Commissioner invoked the extended period for demanding tax, citing that the appellant did not pay the applicable service tax. The appellant argued that the extended period should not be invoked as there was no suppression of facts, and the department itself had previously accepted similar transactions as non-taxable. The Tribunal did not explicitly address this issue in the final order but set aside the entire demand, implicitly rejecting the basis for invoking the extended period.

5. Imposition of penalties:
The Commissioner imposed penalties under Section 78 and Section 77(1)(a) of the Finance Act, 1994. The appellant argued that penalties were not justified as the transaction was a deemed sale and not a service. The Tribunal, by setting aside the impugned order, also nullified the penalties imposed.

Conclusion:
The Tribunal concluded that the appellant's activity of leasing work-wear constituted a transfer of the right to use goods, amounting to a deemed sale and not a service. The Tribunal relied on the Supreme Court's decision in the BSNL case and other precedents to determine that the appellant had transferred effective control to the customers. Consequently, the demand for service tax, along with penalties, was set aside, and the appeal was allowed.

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