2025 (1) TMI 939 - AT - Service Tax

Classification of service - supply of tug to MPT - to be classified under the category of Supply of Tangible Goods or not - deemed sale - taxable event - Extended period of limitation. Whether in the given facts of the case and especially the contract dt.25.05.2007 the activities of the appellant in relation to MPT would be classifiable under Section 65(105)(zzzzj) as service under Supply of tangible goods or it would be in the nature of deemed sale and therefore liable to VAT and not liable to Service Tax? - HELD THAT - There are many conditions which would indicate that the transfer of right to use is not absolute and there are certain conditions and provisions which make the contract different than a pure legal transfer of right i.e. lease of goods. For example the contract itself is for hiring of motor tug sigma with all its complement of qualified and experienced master officers and crew for a specified purpose of berthing and unberthing of vessels at Mormugao Port and the appellants are required to pay the wages and allowances of the master and crew as well as to pay for victualling paints repairs and survey costs for maintaining her classification certificates. Effectively this would mean that during the period of contract apart from providing skilled manpower to operate the tug its repairs and other statutory compliances are with the appellant and not with the MPT. Further there is a clear clause whereby the MPT will not be liable against third party claim for which the appellants are required to take appropriate insurance and provide copy of the said insurance to the MPT. A holistic reading of all the clauses of the contract and the arguments made by both the sides it would be apparent that the contract is not passing the five tests stipulated in the BSNL case and therefore on that count itself cannot be treated as a contract where there has been transfer of right to use as well as effective control - when the substantial control remains with the contractor/appellant and is not handed over to the MPT there is no transfer of right to use. Therefore it cannot be said that this hire agreement is involving deemed sale and therefore liable to VAT. Whether in the event of the activities being classifiable under Supply of tangible goods the taxable event i.e. signing of contract being prior to introduction of service would lead to non-levy of Service Tax on the considerations received post introduction of the service or otherwise? - HELD THAT - The Service Tax up to 28.02.2011 was required to be paid by the 5th of the month immediately following the calendar month in which the payments are received towards the value of the taxable services. Further the rule also provides that notwithstanding the time of receipt of the payment towards the value of services no Service Tax shall be payable for the part or whole of the value of services which is attributable to services provided during the period when such services were not taxable . Therefore for the period prior to 01.03.2011 Rule 6 will govern the payment of Service Tax and therefore if any Service Tax is demanded for the period when the service itself was not leviable to Service Tax the same cannot be sustained. On this count the demand for Service Tax for the period prior to introduction of STG i.e. 01.03.2008 will not sustain on this count itself. Therefore it is evident that the payments are being received before 7th day of the succeeding month of hire on submission of certificate of satisfactory service from the Deputy Conservator of MPT and therefore it means that it is only afte satisfactory compliance the payments are being made and therefore the argument of the appellants that service has been rendered when the tug is delivered is misplaced - the said hire agreement is for providing services of berthing and unberthing and not for supply of tugs and that it is for continuous supply of said service which is required to be assessed on monthly basis and only subject to satisfaction the payments are released in the succeeding months. Time limitation - Penalty - HELD THAT - In the facts of the case the department has not been able to produce any positive evidence about the appellant s intent to evade payment of Service Tax or deliberately suppressing the relevant facts with intent to evade payment of Service Tax. Considering the complex nature of classification of STG without transfer of legal right to use and effective control vis- -vis provisions under the VAT Rules for deemed sale there is some relevance in the arguments that they were under bonafide belief that the transaction would not be a transaction of supply of service rather it will be covered by deemed sale more so when they got a clarification from the statutory authority under VAT laws which may not be binding on Service Tax authority working under the provisions of the Finance Act 1994. There are force in the contention of the appellant that they were under bonafide belief especially when they had got clarification from the concerned commercial tax authorities and in fact they started paying VAT also. Thus merely because a copy of the contract was found in the course of audit in the absence of any positive and cogent grounds for invoking extended period or for imposing penalty etc. the extended period as well as imposition of penalty is not sustainable in the facts of the case. Conclusion - i) The contract was classified as a service under STG not a deemed sale and thus subject to Service Tax. ii) Service Tax was applicable on payments received post-introduction of the STG service regardless of the contract s signing date. Appeal allowed in part by way of remand.

Summary

1. ISSUES PRESENTED and CONSIDERED

The judgment addresses the following core legal issues:

• Whether the activities of the appellant, involving the hiring of motor tugs to the Mormugao Port Trust (MPT), are classifiable as a service under the category of 'Supply of Tangible Goods' (STG) or as a 'deemed sale' liable to VAT.
• Whether the taxable event, being the signing of the contract before the introduction of the STG service, affects the levy of Service Tax on considerations received post-introduction.

2. ISSUE-WISE DETAILED ANALYSIS

Issue A: Classification under STG or Deemed Sale

• Relevant legal framework and precedents: The classification hinges on whether there is a transfer of the right to use the goods, which would constitute a deemed sale under Article 366(29A)(d) of the Constitution, or merely a service under Section 65(105)(zzzzj) of the Finance Act. The BSNL judgment provides the five criteria for determining the transfer of the right to use goods.
• Court's interpretation and reasoning: The court analyzed the contract between the appellant and MPT, considering the BSNL judgment's criteria. It concluded that the contract did not satisfy all the conditions for a transfer of the right to use goods, particularly regarding legal possession and effective control.
• Key evidence and findings: The contract was titled as a "hire agreement," with several clauses indicating that the appellant retained control over the tug and its crew. The MPT was indemnified against third-party claims, and the appellant was responsible for maintenance and insurance.
• Application of law to facts: The court found that the appellant retained substantial control over the tug, indicating that the transaction was not a deemed sale but rather a service of supplying tangible goods.
• Treatment of competing arguments: The appellant argued that the transaction was a deemed sale based on a VAT ruling, while the department argued it was a service due to the lack of transfer of control. The court sided with the department after analyzing the contract's terms.
• Conclusions: The court concluded that the transaction was a service under STG, not a deemed sale, making it liable for Service Tax.

Issue B: Impact of Contract Timing on Tax Liability

• Relevant legal framework and precedents: The Point of Taxation Rules, 2011, and Rule 6 of the Service Tax Rules, 1994, determine the timing of the taxable event for Service Tax purposes.
• Court's interpretation and reasoning: The court noted that the timing of the contract's signing did not preclude the levy of Service Tax on payments received after the introduction of the STG service. The service was continuous, and payments were made monthly based on service completion.
• Key evidence and findings: Payments were made monthly upon satisfactory service completion, indicating an ongoing service rather than a one-time event.
• Application of law to facts: The court applied the Point of Taxation Rules to determine that Service Tax was due on payments received after the service's introduction, regardless of the contract's signing date.
• Treatment of competing arguments: The appellant argued that the contract's signing before the service's introduction exempted them from Service Tax. The court disagreed, emphasizing the continuous nature of the service.
• Conclusions: The court held that Service Tax was applicable on payments received after the introduction of the STG service.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "This is a contract for 'supply of tangible goods' on hire basis without transferring the legal right to possess and effective control and hence, leviable to Service Tax."
• Core principles established: The judgment reinforced the distinction between a service and a deemed sale based on the transfer of possession and control, as outlined in the BSNL judgment.
• Final determinations on each issue:
  • The contract was classified as a service under STG, not a deemed sale, and thus subject to Service Tax.
  • Service Tax was applicable on payments received post-introduction of the STG service, regardless of the contract's signing date.