whether CONSTRUCTION EQUIPMENT on lease at site is liable to SERVICE TAX or VAT, Service Tax

[SADIA ANSARI]

I want to know whether CONSTRUCTION EQUIPMMENT taken on lease at site is whether liable to Service Tax or VAT.

What conditions should be fullfilled ?

please give ruling and case study reference(s).

Posts / Replies

[KASTURI SETHI]

Construction equipment taken on lease is a service and it is covered under the category of "Right To Use Of Tangible Goods Services" under erstwhile Section 65 (105) (zzzz) but now under 'Other Than Negative List'. Ownership of equipment is not transferred to the lessee and it is leased for a specified period.Hence the element of sale is not involved.As per dictionary meaning of 'leasing, premium received on account of leasing is rent.

Abatement of 90% granted to equipment leasing vide notification nos.[Notification No. 4/2006-S.T., dated 1-3-2006] and 13/12-ST dated 17.3.12 was withdrawn vide notification no.26/12-ST dated 20.6.2012. ( This proves it is service)

Case law 2010(20)STR.417(SC) = 2010 (10) TMI 4 - SUPREME COURT OF INDIA in the case of Association of Leasing & Financial Services Co. Vs.UOI (Para No. 40 of the decision) is worth reading.

 

 

[Ganeshan Kalyani]

With due respect I would submit that though the ownership remains with the owner the right to use the equipment is with the lesse and it would tantamount to deemed sale and VAT would be applicable. However if service tax is applicable then VAT will not apply and vice versa. This is my view.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

Sir,

State Govt. has its own rules regarding VAT and its definition. In the eyes of State Law, leasing may be deemed sale but Central Govt. has allowed abatement of 90% treating it as service vide notification no. mentioned. Abatement was allowed from 1.3.6 to 30.6.2012. Abatement has been withdrawn but status of service continues.The Apex Court has also treated it service. There is also another judgement of S.C. but that was old so I did not mention. Definition of 'Right to use of tangible goods' has not been changed because old accounting codes are in force though for statistical purpose. Ultimately Equipment/goods are to be returned to the owner. In sale the goods are sold for ever and ownership is changed for ever. In the eyes of State law, what is the definition of 'deemed sale' I do not know.

[YAGAY AND SUN]

The principle of effective possession and control will decide the fate of this matter.

[KASTURI SETHI]

M/s. YAGAY AND SUN,

Dear Sirs, Will you please further elaborate your reply ? You mean to say it depends upon the terms and conditions of the agreement, if any ? Without going into the agreement, we can say that ownership will remain with the lessor and leased equipment will ultimately be returned to the lessor by the lessee after its usage for a specified period. In my view effective possession and control will remain with the lessor. Pl. throw more light on the issue especially keeping in view the legal definition of 'LEASE' and the judgement of the Apex Court.

Your esteemed views will be an education for me.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

What is deemed sale in terms State law/VAT law ? It is required to quench my thrust of knowledge. Thanks.

[Akash Deep]

Dear all

it i good you see a lively discussion.

my view is that "ownership of goods" and "possession of goods" are two different and distinct things. under deened sale ownership of goods has nothing to do with. All matters is effective control and possession of goods. for example a thief may have your car but ownership is still with you. Ownership is he legal entitlement to a thing whereas possession is just manifestation of ownership and that possession may have been obtained by legal or illegal means. Though is right to say that possession is 9/10th of ownership.

so, if on the basis of agreement is is proved that effective control and possession of the goods not ownership is transferred, it will be a case of deemed sale and not service.

when effective control and possession of goods has been transfered, will depend on particular nature of transaction.

[YAGAY AND SUN]

Well explained by Mr. Akash Deep.

[Akash Deep]

Thaks sir yagav and sun

[KASTURI SETHI]

Sh.Akash Deep ji,

Thanks a lot for clarifying the difference between the terms, "Ownership of the goods", "Possession of the goods" and "Deemed sale". Concept is clear to me. I agree with you, M/s.YAGAY AND SUN and Sh.Ganeshan Kalyani, Sirs. Determining factor would be the nature of the agreement executed between lessor and the lessee.

[Ganeshan Kalyani]

Thanks Akash Sir for giving your valuable views and clarify the things with such beautiful example. I am very much sure that these discussions boons to the queriest and to the spectators as well. Thanks to Kasturi Sir for being curious on the subject.

[Akash Deep]

Dear All

Thanks for your appreciation.

@ Kasturi Sir, Please do not refer me as "Akash Deep Ji" Simple Akash or Akash Deep" will do. I am much junior to you in age as well as in experience and drawing inspiration from peoples like you. Thanks again

[KASTURI SETHI]

Sir,

It is my moral duty as well as official decorum to pay respect even to junior-may be age-wise or experience. I am also of the view that even a teacher can learn from a student.It is a fact it happens. Rest as you like.

[KASTURI SETHI]

Sir,

In this context, To prove effective control and possession of the goods (not ownership ) is transferred to the recipient of service, is an uphill task for any service provider/receiver and it will lead to litigation.The assessee would be a victim of 'TRAP OF WORDS''

[Ganeshan Kalyani]

The word leese itself clarifies that the ownership remains with the provider of service and receiver is just having effective control and it deeming to be deemed sale. in many organisations they are getting the machinery on leese basis and the agreement justifies that the receiver have only effective control of the machinery and the ownership remains with the original supplier. This is my view. Thanks.

[KASTURI SETHI]

Sh.Ganeshan Kalyani Ji,

I agree with you to the extent that in the eyes of VAT it may be deemed sale. I do not know about VAT or CST. As per legal dictionary, leasing means renting also. Whether leasing equipment is service or not depends upon the terms and conditions of the agreement ?