2025 (3) TMI 507 - AT - Service Tax

Levy of VAT/sales tax - supply of tangible goods service or not - demand based on DG sets supplied on lease by the appellant to IOCL and the DG sets sold by the appellant to its customers - contracts involving the sale of DG sets along with their installation and commissioning by the appellant - works contract service or not - demand based on an assumed 25% growth in service tax liability under the head of works contract service. Whether the supply of DG sets by the appellant to Indian Oil Corporation Limited (IOCL) constitutes a supply of tangible goods service under section 65 (105)(zzzzj) of the Finance Act 1994 or a deemed sale under Article 366(29A) of the Constitution of India thereby subject to VAT/sales tax rather than service tax? - HELD THAT - The Supreme Court had held in the case of State of Madras vs. Ganon Dunkerly Company Limited 1958 (4) TMI 42 - SUPREME COURT held that the State Government s had no power to levy sales tax on deemed sales considering the value of the goods used in works contract. Thereafter the Constitution of India was amended and a new clause (29A) was inserted in Article 366(definition clause of the Constitution). This clause 29A enlarged the scope of expression sale and purchase of goods to include goods used in works contract service and also goods which are supplied on lease giving effective possession and control to the transferee. In 1994 the Central Government in exercise of the powers under entry 97 (residual entry) of list-1 imposed service tax. The service tax could be imposed under this entry only on such activities which did not fall under the State list. Since the supply of tangible goods by giving effective possession and control is deemed to be a sale as per Article 366 (29A) all such transfers are chargeable to sales tax/ VAT by the State Government - However where the goods are leased without giving effective possession and control of the goods to the transferee it was covered under the service tax under section 65 (105)(zzzzd). Thus there are two types of lease contracts-where the effective possession and control is given to the transferee and VAT/ sales tax is payable and where there is no effective possession and control to the transferee and service tax is chargeable. It is found that only VAT could have been charged by the State Government on the DG sets supplied by the appellant to IOCL. No service tax under section 65 (105)(zzzzd) could have been charged. Therefore the demand in the first show cause notice cannot be sustained and needs to be set aside. Whether the contracts involving the sale of DG sets along with their installation and commissioning by the appellant amount to works contract service subject to service tax? - The pre-dominant nature of the contract is that of sale of DG set. When a large equipment such as DG set is purchased the customer naturally wants the seller to install and commission it so to necessary to ensure that the DG sets were in working order. Merely because the goods were installed and commissioned after sale the contract would not become a works contract services. It is more or less like a refrigerator or air-conditioner bought by someone for home use. The seller sells the refrigerator and also delivers and installs which satisfies the buyer that it is in good working condition. Therefore the demand of service tax on the sale of generators by treating them as works contracts merely because the generators were also installed and commissioned by the appellant cannot be sustained and is liable to be set aside. Validity of the statement of demand based on an assumed 25% growth in service tax liability under the head of works contract service - HELD THAT - Since it is found that in favour of the assessee and against the Revenue on the demand of service tax on the DG sets sold this demand also needs to be set aside. Conclusion - i) The demand for service tax under supply of tangible goods service was set aside recognizing the transaction as a deemed sale. ii) The demand for service tax under works contract service was set aside affirming the transaction as a sale with incidental installation. iii) The statement of demand based on assumed growth was set aside due to lack of evidence. The impugned order is set aside - appeal allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

1. Whether the supply of DG sets by the appellant to Indian Oil Corporation Limited (IOCL) constitutes a "supply of tangible goods service" under section 65 (105)(zzzzj) of the Finance Act, 1994, or a deemed sale under Article 366(29A) of the Constitution of India, thereby subject to VAT/sales tax rather than service tax.

2. Whether the contracts involving the sale of DG sets, along with their installation and commissioning by the appellant, amount to "works contract service" subject to service tax.

3. The validity of the statement of demand based on an assumed 25% growth in service tax liability under the head of "works contract service."

ISSUE-WISE DETAILED ANALYSIS

1. Supply of Tangible Goods Service vs. Deemed Sale

Relevant legal framework and precedents: The primary legal framework involves section 65 (105)(zzzzj) of the Finance Act, 1994, and Article 366(29A) of the Constitution of India. The Supreme Court's decision in Bharat Sanchar Nigam vs. Union of India provides criteria to determine if a transaction is a deemed sale.

Court's interpretation and reasoning: The Court analyzed whether the DG sets supplied to IOCL constituted a transfer of effective possession and control, which would classify the transaction as a deemed sale, thus subject to VAT/sales tax rather than service tax.

Key evidence and findings: The appellant supplied DG sets to IOCL, and the Court examined whether the five criteria established in Bharat Sanchar Nigam were met, indicating a transfer of effective possession and control.

Application of law to facts: The Court found that all five criteria were fulfilled, indicating a transfer of effective possession and control to IOCL. Therefore, the transaction was a deemed sale, subject to VAT/sales tax.

Treatment of competing arguments: The appellant argued that the transaction was a deemed sale, while the department contended it was a supply of tangible goods service. The Court favored the appellant's argument based on the fulfillment of the criteria.

Conclusions: The demand for service tax under the head "supply of tangible goods service" was not sustainable and was set aside.

2. Works Contract Service

Relevant legal framework and precedents: The classification of contracts as "works contract service" involves determining whether the contract involves both the transfer of goods and the provision of services.

Court's interpretation and reasoning: The Court considered whether the installation and commissioning of DG sets, as part of the sale contract, constituted a "works contract service."

Key evidence and findings: The appellant sold DG sets and installed them as part of the sale agreement without charging separately for installation and commissioning.

Application of law to facts: The Court found that the predominant nature of the contract was the sale of DG sets, and the installation was incidental to the sale, not constituting a separate service.

Treatment of competing arguments: The appellant argued that the contract was purely a sale, while the department classified it as a works contract. The Court sided with the appellant, emphasizing the sale's predominant nature.

Conclusions: The demand for service tax under "works contract service" was not sustainable and was set aside.

3. Statement of Demand Based on Assumed Growth

Relevant legal framework and precedents: The statement of demand was based on an assumed 25% growth in service tax liability.

Court's interpretation and reasoning: The Court found no evidence supporting the assumption of growth and considered the demand speculative.

Key evidence and findings: The demand was based on projections without concrete evidence.

Application of law to facts: The Court found the demand unsustainable due to its speculative nature.

Treatment of competing arguments: The appellant challenged the speculative basis of the demand, and the Court agreed.

Conclusions: The statement of demand was set aside.

SIGNIFICANT HOLDINGS

The Court established core principles regarding the classification of transactions as deemed sales versus services. It clarified that effective possession and control determine the nature of the transaction, influencing tax liability.

Final determinations on each issue:

- The demand for service tax under "supply of tangible goods service" was set aside, recognizing the transaction as a deemed sale.

- The demand for service tax under "works contract service" was set aside, affirming the transaction as a sale with incidental installation.

- The statement of demand based on assumed growth was set aside due to lack of evidence.

The appeal was allowed, and the impugned order was set aside, providing consequential relief to the appellant.