2022 (10) TMI 806 - HC - Service Tax

Nature of transaction - service or deemed sale - transfer of the right to use the containers for valuable consideration - company (in liquidation) was engaged in providing Cargo Carrying Units (CCU or containers) on rental basis to its customers - containers were not owned by the company (in liquidation) but were taken on lease from one Monument Containers Limited, England - HELD THAT - The relationship between the company (in liquidation) and the lessee cannot fall under the definition of taxable service under Section 65 (105)(zzzzj) of Finance Act, 1994. Section 65 (105)(zzzzj) will apply only where a service is provided in relation to supply of tangible goods without transferring right of possession and effective control, whereas factually in this case, there has been transfer of right of possession and effective control on the containers. The lease agreement, therefore, provides that the lessee would keep possession of the identified containers, the lessee will have legal right to use the containers, the lessee would have the liberty to even sub-lease the containers to third parties who have been approved in the agreement, it is the lessee s obligation to obtain and keep in full force at no cost to the company (in liquidation) all permissions, licenses, authorisations and repair or replace any lost or stolen or worn out containers and all risk of loss or damage to the containers shall pass immediately from the company (in liquidation) to the lessee on delivery. The lease agreement also provides that on the expiry of the term of the lease, the lessee shall, at its risk and expense, return the containers to the company (in liquidation) - The company (in liquidation) cannot hand over those containers to anyone else and the right to use the containers during the period of lease is effectively transferred. There shall be a deemed sale where there is a transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. Here from the documents, it is quite clear that there has been a transfer of the right to use the containers for valuable consideration. Clause (29A) of Article 366 of the Constitution does not distinguish between an owner or a lessor of the goods. Only requirement is there should be a transfer of the right to use the goods for valuable consideration - Admittedly, the company (in liquidation) had provided the containers to the lessee on lease basis and recovered lease rental on which appropriate VAT at the rate of 12.5% was paid by the company (in liquidation). In the present case, it is not in dispute that the company (in liquidation) had given the containers to the lessee on rental basis and possession and control was always with the lessee and the sole ground on which the demand is confirmed is that the company (in liquidation) was not owner of the containers - For a transaction to be deemed sale there is no requirement of transfer of ownership and once it is not disputed that the containers are given on lease and possession and control is transferred, it is a deemed sale within the meaning of Article 336(29A)(d) of the Constitution of India and outside the purview of Finance Act, 1994. The impugned order dated 31st January 2022 is hereby quashed and set aside - Petition disposed off.

Issues Involved:
1. Whether the transaction in question constituted a "deemed sale" under the Maharashtra Value Added Tax Act (MVAT Act) or a taxable service under the Finance Act, 1994.
2. Whether the impugned order by respondent no.3 was based on correct facts and legal interpretation.
3. Whether VAT and service tax can be levied on the same transaction.
4. Whether the computation of tax liability by respondent no.3 was accurate.

Issue-wise Detailed Analysis:

1. Deemed Sale vs. Taxable Service:
The petitioner contested an order demanding service tax on a transaction deemed as a sale under the MVAT Act, on which VAT was already levied and collected. The company (in liquidation) provided Cargo Carrying Units (CCUs) on a sub-lease basis to a lessee, and VAT was paid on the lease rental. The petitioner argued that the transaction was a "transfer of right to use" goods, falling under Article 366 (29A)(d) of the Constitution, which defines such transactions as deemed sales subject to VAT. The court agreed, noting that the transfer included possession and effective control of the containers, thus excluding it from the definition of service under Section 65B(44) of the Finance Act, 1994.

2. Impugned Order's Basis:
Respondent no.3 alleged that the company (in liquidation) failed to pay service tax and obtain service tax registration after crossing the threshold limit. However, the court found that respondent no.3's conclusions were based on incorrect assumptions and surmises. The court noted that the turnover was Rs.1,25,07,056/- and not Rs.1,40,70,443/- as alleged. Additionally, there was no evidence that the company (in liquidation) did not transfer the right to use the containers. The court emphasized that for previous years, respondent no.3 had accepted that no service tax was payable for the same agreement.

3. VAT and Service Tax on Same Transaction:
The court reiterated that sale of goods and services are mutually exclusive, and both VAT and service tax cannot be levied on the same transaction. It was an admitted fact that VAT was paid on the lease rental. The court referred to the Supreme Court's ruling in Imagic Creative Private Limited, which held that service tax and sales tax are mutually exclusive. The court also cited the Central Government's Circular No.198/08/2016-SERVICE TAX, clarifying that transfer of right to use goods is deemed a sale and not subject to service tax.

4. Computation of Tax Liability:
The court found that respondent no.3 erred in computing the tax liability by including the VAT component in the taxable value for service tax. The base figure of Rs.1,40,70,443/- included VAT of Rs.15,63,387/-, leading to incorrect service tax computation. The court noted that there was no discussion in the impugned order on how service tax could be levied on the VAT component. Respondent no.3's admission that service tax is not leviable on the VAT component further supported the petitioner's case.

Conclusion:
The court quashed and set aside the impugned order dated 31st January 2022, ruling that the transaction was a deemed sale subject to VAT and not a taxable service under the Finance Act, 1994. The court emphasized that VAT and service tax are mutually exclusive and cannot be levied on the same transaction. The court also highlighted the errors in tax liability computation by respondent no.3 and made the rule absolute in favor of the petitioner. The petition was disposed of with no order as to costs.

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