2024 (1) TMI 452 - AT - Service Tax

Classification of services - supply of tangible goods for use services or not - hiring of the equipment by the appellants to the client - HELD THAT - The services can be classified under supply of tangible goods for use service only when right to possession and effective control of the equipment is not transferred to the service recipient. In the present case as per arrangement between the appellant and the service recipient, since after giving the equipment on hire to the service recipient, the right to possession and effective control is with the service recipient who possessed the equipment and operated the same with their own employee. It is also undisputed fact that the appellants have discharged the VAT considering the same as deemed sale under Article 366 (29A) of Constitution of India. Therefore, the hiring of equipment under this fact cannot be classified as supply of tangible goods for use service in terms of Section 65 (105) (zzzj) of Finance Act, 1994. The Hon ble Supreme Court in UFO Moviez India Limited 2017 (9) TMI 507 - CESTAT MUMBAI has given the observation that where the VAT is paid no service tax can be demanded. The impugned orders are set aside - Appeals are allowed.

Summary

Issues Involved:
1. Classification of the hiring of equipment under "supply of tangible goods for use services."
2. Applicability of VAT versus Service Tax on the transaction.
3. Admissibility of CENVAT credit on capital goods.

Summary:

Issue 1: Classification of Hiring of Equipment

The appellants are engaged in providing de-humidifiers on a hire basis. The department classified this under "supply of tangible goods for use services" taxable under Section 65 (105) (zzzj) of the Finance Act, 1994. The appellants argued that they have two modules for renting: one where the customer has complete possession and control, and another where the appellant retains control. For the first module, they paid VAT, considering it a deemed sale under Article 366 (29A) of the Constitution of India. The Tribunal found that since the possession and control were transferred to the customer, it does not fall under the taxable service category as per Section 65 (105) (zzzj). The Tribunal relied on several judgments, including UFO Moviez India Ltd., which clarified that if VAT is paid, service tax cannot be demanded.

Issue 2: Applicability of VAT versus Service Tax

The Tribunal emphasized that the service can only be classified under "supply of tangible goods for use services" if the right to possession and control is not transferred to the service recipient. In this case, since the appellants transferred possession and control to the customers and paid VAT, the transaction cannot be taxed under service tax. The Tribunal cited the Supreme Court's observation in UFO Moviez India Ltd., stating that where VAT is paid, service tax cannot be claimed.

Issue 3: Admissibility of CENVAT Credit on Capital Goods

The Tribunal also addressed the issue of CENVAT credit on capital goods. It found that the appellants were eligible for CENVAT credit as the equipment was used for providing output services. The Tribunal noted that the appellant had been paying VAT since 2006 and had disclosed CENVAT credit on capital goods in their returns. The Tribunal concluded that there was no suppression of facts and set aside the demand for CENVAT credit on merit and limitation.

Conclusion:

The impugned orders were set aside, and the appeals were allowed with consequential relief. The Tribunal ruled that the hiring of equipment under the first module, where possession and control were transferred to the customer, does not fall under "supply of tangible goods for use services" and is not subject to service tax. The appellants were also entitled to CENVAT credit on capital goods.