2023 (9) TMI 1495 - AT - Service Tax

Nature of activity - deemed sale or supply of tangible goods services? - business of providing customised gas production units and cryogenic vacuum insulated storage tanks with all accessories such as vaporizer for storage of gas on rental / lease basis - HELD THAT - From the reading of the definition of supply of tangible goods service, it is clear that the service under supply of tangible goods service will qualify not only by supply of the tangible goods for use simplicitor but with that the important rider attached is the said supply should be without transferring right of possession and effective control of machinery, equipment and appliances. In the fact of the present case though the machinery equipments were supplied for use by the customer but right to possession and effective control has been transferred. From the circular No. 334/01/2008-TRU dated 29 February 2008 it is abundantly clear that in a case where there is a transfer of right of use in any goods the same is leviable to Sale Tax / VAT as deemed sale of the goods where the transfer of right to use involves transfer of both possession and control of the goods to the user of the goods, the same is not excigible to service tax under the category of supply of tangible goods service. More or less similar issue in the appellant‟s group company‟s case that is Air Liquid North India Pvt Ltd. 2017 (6) TMI 476 - CESTAT NEW DELHI was considered wherein though the demand was raised under business support service but the transaction was identical and the demand was set aside considering the transaction is a deemed sale in terms of Article 366 (29A) (d) of Constitution Of India. The demand under supply of tangible goods service in the present case is not sustainable - the impugned orders are set aside - Appeal allowed.

Issues Involved
1. Classification of the appellant's activity under "supply of tangible goods services" as per Section 65(105)(ZZZZJ) of the Finance Act, 1994.
2. Applicability of VAT versus Service Tax on the transactions.
3. Transfer of right to possession and effective control of the goods.
4. Precedent cases and circulars supporting the appellant's position.

Detailed Analysis

1. Classification under "Supply of Tangible Goods Services":
The primary issue was whether the appellant's activity of leasing FLOXAL Units, storage tanks, and other equipment falls under the "supply of tangible goods services" as defined in Section 65(105)(ZZZZJ) of the Finance Act, 1994. According to this definition, the service qualifies if the supply of tangible goods is without transferring the right of possession and effective control of such goods. The appellant argued that once the equipment was installed at the customer's premises, the right to possession and effective control was transferred to the customer. Therefore, the transaction should not be classified under "supply of tangible goods services."

2. Applicability of VAT versus Service Tax:
The appellant had been paying VAT on the lease transactions since 1996, under the belief that the activity constituted a sale as per Section 2(23) of the Gujarat Value Added Tax Act, 2003, and Section 2(g)(iv) of the Central Sales Tax Act, 1946. The appellant contended that since VAT was already being paid, the transaction should not be subject to service tax. The tribunal noted that the transaction was a deemed sale under Article 366(29A) of the Constitution of India, which includes the transfer of the right to use any goods for any purpose for cash, deferred payment, or other valuable consideration.

3. Transfer of Right to Possession and Effective Control:
The tribunal examined whether the appellant had transferred the right to possession and effective control of the equipment to the customers. It was found that the customers had full liberty to possess and use the equipment for their production activities. The appellant was responsible for the operation of the FLOXAL Unit, but the customers bore the responsibility for any injury or damage to third parties. This indicated that the right to possession and effective control was indeed transferred to the customers, thereby excluding the transaction from the scope of "supply of tangible goods services."

4. Precedent Cases and Circulars:
The appellant cited various circulars and judgments to support their case. Circular No. 334/1/2008-TRU dated 29.02.2008 clarified that the supply of tangible goods involving the transfer of possession and control is subject to VAT and not service tax. The tribunal referred to several cases, including Quippo Energy Pvt. Ltd Vs CST and Air Liquide North India Pvt. Ltd Vs CCE, which supported the appellant's position that the transfer of the right to use goods constitutes a sale and is not subject to service tax. The tribunal also noted that the appellant had been consistently paying VAT on these transactions, reinforcing the argument that the transactions were deemed sales.

Conclusion:
The tribunal concluded that the appellant's activity of leasing equipment did not fall under the "supply of tangible goods services" as the right to possession and effective control was transferred to the customers. Consequently, the demand for service tax was not sustainable. The tribunal set aside the impugned orders and allowed the appeals, providing relief to the appellant.

Pronouncement:
The judgment was pronounced in the open court on 13.09.2023, setting aside the demand under "supply of tangible goods services" and allowing the appeals with consequential relief.

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