SUPPLY OF TANGIBLE GOODS SERVICE

[Mr. M. GOVINDARAJAN]

Definition

This service was brought into the service tax net vide Notification No. 18/2008-ST, dated 10.05.2008 with effect from 16.05.2008.  Section 65 (105) (zzzzj) of the Act defines the taxable services in respect of supply of tangible goods as any service provided or to be provided to any person, by any other person to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances.

Clarification by the Department

Vide M.F.( D.R.) letter F. No. 334/1/2008 dt. 29.02.2008 the Board issued clarifications on the scope of supply of tangible goods for use service as detailed below:

• Transfer of the right to use any goods is leviable to sales tax/ VAT as deemed sale of goods [Article 366(29A)(d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods;
• Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, etc., offshore construction vessels & barges, geo-technical vessels, tug and barge flotillas, rigs and high value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service.
• Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT / sales tax as deemed sale of goods, is not covered under the scope of the proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether or no VAT is payable or paid.

CENVAT CREDIT

In some cases, vehicles, aircrafts, vessels etc., are also supplied in the above manner and such activities also fall under the said taxable service. In this regard, a doubt has arisen whether the credit of excise duty/Additional duty of Customs (commonly known as CVD) paid on such items are available to the provider of such taxable service and if so whether such goods should be considered as ‘inputs’ or ‘capital goods’, for the purposes of the CENVAT Credit Rules, 2004.

The Board examined the above issue.   It clarified vide lr. No. F. No. 37/120/2008-CX.4, dated 23.10.2008.  It is possible that some of such goods may either fall within the definition of ‘capital goods’ or may not be covered under the said definition. However, as these goods are primary requirements for providing the above mentioned ‘output services’ for such service providers, the goods including vehicles, aircrafts, vessels etc., are in the nature of ‘inputs’. It is emphasized here that this clarification is valid only when the output service is in the nature of service defined under the provisions of Section 65(105) (zzzzj) of Finance Act, 1994 and the goods in question are the tangible goods supplied during the course of providing the taxable service.

Case laws

In ‘Coal carriers V. Commissioner of  Central Excise, Customs & Service Tax, Bhubaneswar’ – 2011 (2) TMI 1140 - ORISSA HIGH COURT  the supply of pay loaders is an aid to loading of coal into Railway wagons and not as letting out loaders on hire.  The obligation of the assessee is not ending with letting out of pay loaders but extended to loading of required quantity within given time frame and charges were payable accordingly.  The findings of Assessing Officer that the goods meant for transportation from one place to another by any mode of transport were ‘cargo’, ‘loading’ meant putting lead on car or vessels and activity taken by assessee was liable to service tax as ‘Cargo handling services’ under Section 65(23) read with Section 65(105)(25) of Finance Act and not under ‘Supply of Tangible Goods Service’ under Section 65 (105) (zzzzj) ibid.

In ‘Sahakar Maharishi Shankarrao Mohite Patil SSK Limited V. Commissioner of Central Excise, Pune – III’ – 2012 (12) TMI 275 - CESTAT MUMBAI  it was held that as per the definition of tangible goods service it includes machinery, equipment and appliances.   Bullock cars cannot be considered as machinery, equipment or appliance.

In ‘G.S. Lamba & Sons V. State of Andhra Pradesh’ – 2011 (1) TMI 1196 - Andhra Pradesh High Court the petitioners entered with a contract with Grasim, Manufacturers of ready mix concrete (RMG) for providing transportation service for shipping.   RMC by hiring specially designed transit mixers.   Under the contract the transit mixers are never transferred and effective control over running and using of these vehicles, as well as disciplinary control over drivers, always remained with petitioners.   It was petitioner’s responsibility to obtain route permits, to take the risk or loss of transportation, to decide the shifts for the drivers and vehicles, to maintain and upkeep the vehicles in good conditions.   The petitioner’s contention was that the contract was for transport service and not the transfer of the right to use the goods.  The High Court observed the essential requirements of a transaction for transfer of the right to use goods are-

• It is not the transfer of property in goods but it is right to use the property in goods;
• Article 366 (29A)(d) read with the latter part of the clauses of (29A) which uses the words ‘and such transfer delivery or supply’ would shot that the tax is not on the delivery of the goods used, but on the transfer of the right to use the goods regardless of when or whether the goods are delivered for use subject to the condition that the goods should be in existence for use;
• In the transaction for the transfer of the right to use goods, delivery of goods is not condition precedent, but the delivery may be one of the elements of the transactions;
• The effective or general control does not mean always physical control and even if the manner, method, modalities and the time of the use of goods is decided by the lessor or the customer, it would be under the effective or general control over the goods;
• The approvals, concessions, licences and permits in relation to goods would also be available to use of the goods even if such licence or permit are in the name of owner (transferor) of the goods; and
• During the period of contract exclusive right to use goods along with the permits, licences etc., vests with the lessee.

In ‘Praveen Engineering Works V. Commissioner of Service Tax, Raigad’ – 2014 (5) TMI 424 - CESTAT MUMBAI  the Tribunal observed that in a large number of cases, it is seen that the invoices have been raised for hiring of equipment.   In this case the appellant merely hired the equipment of M/s MUSCO and they did not provide any operation for operating the equipment nor did they undertake any activity using the equipment.   Therefore the activity of hiring of the equipment would not come under the category of supply of tangible goods for use.   In the use of operational control in the hands of the service provider, the service cannot be classified under ‘supply of tangible goods’ for use.

In ‘Shipping Corporation Limited V. Commissioner of Central Excise & Service Tax (LTU), Mumbai’ – 2013 (12) TMI 1124 - CESTAT MUMBAI  the Tribunal perused the contract entered into between the appellant and the ONGC.   The contract is one for supply of vessels or charter on hire basis and the operation and control of the vessel remains with the appellant.   The vessels are used to store the crude oil produced at Bombay High and also to transport the same to the refineries or to the ports situated in various parts of India.   The purpose of production of oil is for its use and since the crude oil is produced offshore they have to be necessarily transported to refineries situated offshore.  Storage of crude oil is only incidental to the main activity of transportation and the vessels are hired only when pumping of crude cannot be made through pipeline laid under the sea bed or in specific weather condition.   Thus the primary object of charter hiring the vessel is for transportation of crude from the place of production to the refineries in India and not for ‘storage and warehousing’.   The appellant submitted that the period with effect from 16.05.2008 onwards, they have discharged service tax liability under the Section 65 (105) (zzzz).   Therefore the Tribunal directed that the tax paid by them has to be appropriated and accounted under the tangible service.

In ‘Indian National Shoppers Association V. Union of India’ – 2009 (3) TMI 29 - BOMBAY HIGH COURT  it was held that the supply of vessels on charter hire basis for offshore operations would merit classification under ‘supply of tangible goods for use’ which activity was brought under service tax net with effect from 16.05.2008.

After the introduction of negative list regime the transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods is covered under Section 66E(f) as a declared service.