2024 (11) TMI 1413 - HC - Service Tax

Liability to pay service tax in respect of activities carried out by the petitioner during the period 2008-09 to 2014-15 - HELD THAT - The petitioner supplied the goods viz. compressors boosters etc. and other related equipment and necessary manpower to operate and maintain the said equipment for the service receivers. The terms and conditions reveal that the petitioner retained possession and exercised effective control and management over such compressors etc. supplied to their customers - The services rendered by the petitioner therefore fulfil the criteria to be taxable under the category of supply of tangible goods since the equipment was supplied by the petitioner to the service receivers while retaining control over the equipment and without handing over the possession to the service receivers. As is manifest from a reading of clause (ii) of Section 65B(44)(a) a taxable service would include the transfer delivery or supply of any goods except where such transfer delivery or supply be liable to be viewed as a deemed sale by virtue of Article 366(29-A) of the Constitution. It is this definition which informs Section 65(105)(zzzzj) and which brings to tax taxable services provided by a person to another and relating to supply of tangible goods without transferring a right of possession and effective control of such machinery equipment and appliances. While the petitioner would be correct in its submission that a transaction which falls within the ambit of Article 366(29-A) cannot be subjected to a levy of service tax the said contention itself proceeds and rests on whether a transaction was validly taxed under a sales tax statute on the basis of it being and amounting to a deemed sale . Conclusion - Since in the present case the authorities administering the service tax legislation have come to the firm conclusion that there was no transfer of right to use and which conclusion clearly does not merit any interference the mere fact that the petitioner had discharged a purported liability arising under a sales tax legislation or based upon a misinterpretation of the contractual covenants by the fifth respondent would not absolve it of the liability which attaches in terms of Section 65(105)(zzzzj). There are no merit in the challenge raised to the SCNs as well as the impugned order dated 28 November 2016 - petition dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions addressed in this judgment are:

• Whether the activities undertaken by the petitioner, involving the supply of compressors and related services to various companies, are subject to service tax under the category of 'supply of tangible goods services' as per Section 65(105)(zzzzj) of the Finance Act, 1994.
• Whether the transactions in question constitute a 'deemed sale' under Article 366(29-A) of the Constitution, thereby exempting them from service tax and subjecting them to sales tax/VAT instead.
• Whether the petitioner retained possession and effective control over the compressors and related equipment, thereby making the transactions liable for service tax.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of Service Tax under Section 65(105)(zzzzj)

• Relevant legal framework and precedents: Section 65(105)(zzzzj) of the Finance Act, 1994, imposes service tax on services related to the supply of tangible goods without transferring possession and effective control. The provision excludes 'deemed sales' as defined under Article 366(29-A) of the Constitution.
• Court's interpretation and reasoning: The court analyzed the contracts and determined that the petitioner retained possession and effective control over the compressors, thereby falling within the ambit of Section 65(105)(zzzzj).
• Key evidence and findings: The court reviewed the terms of the contracts, which indicated that the petitioner was responsible for the operation, maintenance, and control of the compressors, supporting the conclusion that the petitioner retained effective control.
• Application of law to facts: The court applied the legal framework to the facts, concluding that the transactions were not 'deemed sales' and were subject to service tax as the petitioner retained control over the equipment.
• Treatment of competing arguments: The petitioner argued that the transactions were 'deemed sales' and subject to VAT, but the court rejected this, emphasizing the lack of transfer of possession and control.
• Conclusions: The court concluded that the petitioner's activities were liable for service tax under Section 65(105)(zzzzj) as the transactions did not constitute 'deemed sales'.

Issue 2: Determination of 'Deemed Sale' under Article 366(29-A)

• Relevant legal framework and precedents: Article 366(29-A) of the Constitution defines 'deemed sales', which include the transfer of the right to use goods. The Supreme Court's decision in BSNL vs. Union of India provided guidance on the attributes of a 'right to use'.
• Court's interpretation and reasoning: The court relied on precedents to assess whether the transactions involved a transfer of the right to use. It found that the petitioner did not transfer possession or control, disqualifying the transactions as 'deemed sales'.
• Key evidence and findings: The court examined contractual terms and found that the petitioner retained control and responsibility for the equipment, indicating no transfer of the right to use.
• Application of law to facts: The court applied the principles from BSNL and other cases, determining that the transactions did not meet the criteria for 'deemed sales' due to the retention of control by the petitioner.
• Treatment of competing arguments: The petitioner cited previous tax assessments and legal precedents to argue for 'deemed sale' status, but the court found these inapplicable based on the contractual terms.
• Conclusions: The court concluded that the transactions were not 'deemed sales' and were therefore subject to service tax, not sales tax/VAT.

3. SIGNIFICANT HOLDINGS

• Verbatim quotes of crucial legal reasoning: "The Noticee was in possession and has exercised effective control over such compressors etc supplied to their customers. Therefore, there is no iota of doubt that the wet lease agreements for leasing the compressors and other equipments is a service falling under the taxable category of Supply of Tangible Goods Service."
• Core principles established: The judgment reaffirms that for a transaction to be classified as a 'deemed sale', both possession and effective control must be transferred. Absent these elements, the transaction is subject to service tax under Section 65(105)(zzzzj).
• Final determinations on each issue: The court determined that the petitioner's transactions did not constitute 'deemed sales' and were subject to service tax. The writ petition challenging the service tax liability was dismissed.