2020 (11) TMI 580 - AT - Service Tax

Nature of services - applicability of service tax or VAT - glass bottles and crate rentals - Supply of tangible goods service or not - Appellant has contended that the supply of glass bottles and crates amounted to deemed sale, which was liable to VAT/sales tax as the effective control and possession of the goods were transferred by the Appellant - extended period of limitation - demand of interest and penalty - HELD THAT - The issue is settled by the judgment of the Hon ble Andhra Pradesh High Court in the Writ Petitions No. 21115/2005, No. 856/2006 and No. 25588/2007 2013 (1) TMI 1009 - ANDHRA PRADESH HIGH COURT , where it was held that such crate rentals would be liable to VAT/Sales tax on the ground that it amounted to deemed sale of crates inasmuch as there was transfer of right to use with effective control and possession of crates. It is trite that the transactions which are deemed sales cannot be liable to service tax. Also, it is seen from the order of the learned Adjudicating authority that he has not at all considered the submissions of the Appellant as regards payment of VAT on the said rentals. Further, when the aerated beverages are supplied by the Appellant to its customers, the possession as well as effective control of the said bottles along with crates in which they are supplied to keep them free from spillage and breakage, is also passed by the Appellant assessee as the Appellant cannot govern the action of its customers as to how the customers would deal with such crates and bottles once supplied. The definition of supply of tangible goods states that when there is supply of use of goods without transferring right of possession and effective control of the equipment, the same would fall within the category of supply of tangible goods service - However, in the instant case of the appellant, the entire goods are handed over to the customer who gets the effective possession as well as control to use the goods. Hence, the observation of the Ld. Adjudicating authority that the control and possession has not been passed is not justified and hence is liable to be rejected. Extended period of Limitation - HELD THAT - The demand has been raised for the period 2011-12 in 2017 onwards whereas the spot memo was issued by the Department in 2014 itself. No explanation has been furthered by the Department in respect of such gross delay in proceeding with the matter. Therefore, we find that invocation of the extended period of limitation is not justified. Demand of interest and penalty - HELD THAT - Since demand of service tax is set aside, penalty and interest are also not sustainable. Appeal allowed - decided in favor of appellant.

Summary

Issues:
Service tax demand on glass bottles and crate rentals under Supply of tangible goods service, applicability of VAT on rental charges, validity of demand notice, limitation period for raising demand.

Analysis:
The appellant, a manufacturer of aerated water, transferred possession and control of glass bottles and plastic crates to customers against rental charges included in the sale price. The dispute arose when the Commissioner demanded service tax on these rental charges for the period 2011-12 to 2014-15. The appellant contended that VAT was already paid on these charges under the West Bengal Value Added Tax Act, treating the transfer as a deemed sale of goods. The appellant argued that since VAT was applicable, service tax could not be levied as it falls under the State List. The Commissioner issued a show cause notice in 2017, alleging 'supply of tangible goods for use' service under the Finance Act, 1994. The appellant challenged the demand, citing statutory provisions and previous judgments supporting VAT applicability on similar charges.

The appellant's representative argued that the rental charges were already subject to VAT, citing judgments and VAT assessment orders supporting this position. The demand notice issued in 2017 for the period 2011-12 to 2014-15 was challenged on grounds of limitation, as it was issued after the expiry of five years. The representative highlighted that the department was aware of the facts since 2014, questioning the invocation of an extended limitation period. The department acknowledged acceptance of similar orders for other assesses.

The Tribunal analyzed the case, noting that the effective control and possession of glass bottles and crates were transferred to customers, making it a deemed sale liable to VAT. The Tribunal referred to a judgment by the Andhra Pradesh High Court supporting VAT applicability on such rentals. It observed that transactions deemed as sales cannot be subject to service tax. The Tribunal also found that the department failed to consider the appellant's VAT payments on rentals. Additionally, the Tribunal rejected the department's argument that possession and control were not transferred, citing legal definitions and precedents.

The Tribunal further dismissed the demand based on the limitation period, noting a significant delay between the spot memo issued in 2014 and the demand notice in 2017. The Tribunal concluded that the demand for service tax on glass bottles and crate rentals was unsustainable both on merits and limitation grounds. Consequently, the penalty and interest were also deemed not sustainable. The appeal was allowed in favor of the appellant, providing consequential relief as per the law.