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TMI Blog2022 (10) TMI 806X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas factually in this case, there has been transfer of right of possession and effective control on the containers. The lease agreement, therefore, provides that the lessee would keep possession of the identified containers, the lessee will have legal right to use the containers, the lessee would have the liberty to even sub-lease the containers to third parties who have been approved in the agreement, it is the lessee s obligation to obtain and keep in full force at no cost to the company (in liquidation) all permissions, licenses, authorisations and repair or replace any lost or stolen or worn out containers and all risk of loss or damage to the containers shall pass immediately from the company (in liquidation) to the lessee on delivery. The lease agreement also provides that on the expiry of the term of the lease, the lessee shall, at its risk and expense, return the containers to the company (in liquidation) - The company (in liquidation) cannot hand over those containers to anyone else and the right to use the containers during the period of lease is effectively transferred. There shall be a deemed sale where there is a transfer of the right to use any goods for any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as engaged in providing Cargo Carrying Units (CCU or containers) on rental basis to its customers. Admittedly, the containers were not owned by the company (in liquidation) but were taken on lease from one Monument Containers Limited, England (hereinafter referred to as Monument). The containers were used in the offshore exploration industry to transport and store all types of goods such as consumables, equipment, spares etc. that were required during the offshore exploration activity. 4. As per the lease agreement with Monument, the company (in liquidation) was permitted to give the containers on sub-lease to any party deemed fit and proper. Accordingly, the company (in liquidation) had, vide a lease agreement dated 1st April 2011, given on lease various containers on hire for consideration to one CU Inspection India Private Limited (hereinafter referred to as the lessee). On the lease rental/hire earned by the company (in liquidation), admittedly, the company (in liquidation) discharged VAT at the rate of 12.5%. 5. Respondent no.3 during the course of verification of ITR/TDS data found that the company (in liquidation) had declared turnover of Rs.1,40,70,443/- to the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transfer of right to use goods was subject to levy of VAT. As per Article 366 (29A)(d) of the Constitution of India, tax on sale or purchase of goods includes a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration. Consequently, the definition of sale under the MVAT Act also includes such transfer of right to use goods for any purpose as a deemed sale transaction and accordingly is subject to VAT. The company (in liquidation) has accordingly discharged VAT on the transfer of right to use the containers to the lessee and undertaken necessary compliances under the MVAT Act. 8. Mr. Shah submitted that service tax is applicable on provisions of services and service has been defined under Section 65B(44) of the Finance Act, 1994, which excludes an activity which constitutes merely such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution. According to Mr. Shah, in the case at hand, the containers have been delivered to the lessee and the arrangement between petitioner and lessee is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat what respondent no.3 has assumed was the intention of the parties, Mr. Adik in fairness submitted that there is no such evidence. 12. In the circumstances, in our view, respondent no.3 has proceeded purely on the basis of surmises and what he felt could have been the arrangement between the company (in liquidation) and the lessee. Moreover, as Mr. Shah pointed out, for the previous years respondent no.3 has accepted that no service tax was payable for the same agreement between the company (in liquidation) and the lessee. As submitted by Mr. Shah a notice similar to the one in this case had been issued but it was later withdrawn. 13. Having considered the submissions of Mr. Shah and Mr. Adik and the agreement between the company (in liquidation) and the lessee, copy whereof is annexed to the petition, we are satisfied that the relationship between the company (in liquidation) and the lessee cannot fall under the definition of taxable service under Section 65 (105)(zzzzj) of Finance Act, 1994. Section 65 (105)(zzzzj) will apply only where a service is provided in relation to supply of tangible goods without transferring right of possession and effective control, whereas fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, fines, legal and other professional fees and expenses awarded against or incurred or paid by the Lessor as a result of or in connection with any claim made against Lessor by a third party arising out of, or in connection with this Agreement to the extent that such claim arises out of the breach, negligent performance or failure or delay in performance of the Agreement by the Lessee, its employees, agents or subcontractors. xxxxxxxxxxxxxxxxxx 6.1. All risk of loss of or damage to the Equipment shall pass immediately from the Lessor to the Lessee on the Commencement Date or on delivery under clause 6.3 as the case may be. 6.2. The Lessee acknowledges that execution of this Agreement shall be conclusive evidence that the Lessee shall have taken delivery of and unconditionally accepted the Equipment on 1st day of April 2011 listed in Schedule I for the purpose of this Agreement and found it to be complete, in good working order, of satisfactory quality, fit for the purpose for which it is required and acceptable in every respect. The equipment listed in Schedule I has been delivered to the Lessee in India with all costs paid. 6.3. Delivery of further Equipment sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r : (44) service means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include - (a) an activity which constitutes merely, - (i) xxxxxxxxxxxxxxxxxx (ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29-A) of Article 366 of the Constitution; or xxxxxxxxxxxxxxxxxx 16. Clause (29A) of Article 366 of the Constitution of India reads as under : (29A) - tax on the sale or purchase of goods includes xxxxxxxxxxxxxxxxxx (d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; xxxxxxxxxxxxxxxxxx (f) xxxxxxxxxxxxxxxxxx and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. 17. Section 2(24), 2(28) and Section 3 of the MVAT Act read asunder : 2(24). sale means a sale of goods made within the State for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les or purchases in the said year had] exceeded rupees one lakh, be liable to pay tax, with effect from the appointed day, in accordance with the provisions of this Act, till his certificate or licence is duly cancelled under this Act. Explanation .-For the purposes of this sub-section, the expressions turnover of sales, turnover of purchases― ― and importer shall have the respective meanings― assigned to them under the relevant earlier laws. (2) A dealer to whom sub-section (1) does not apply and whose turnover, [of all sales] made, during the year commencing on the appointed day or any year subsequent thereto, first exceeds the relevant limit, specified in subsection (4), shall, until such liability ceases under subsection (3), be liable to pay tax under this Act with effect from the 1st day of April of the said respective year : Provided that, a dealer shall not be liable to pay tax in respect of [such sales] as take place during the period commencing on the 1st day of April of the said respective year upto the time when his turnover of sales [***], as computed from the 1st day of April of the said respective year, does not exceed the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay tax under this Act and whether or not the principals are disclosed. (7) [***] (8) Where a dealer liable to pay tax under this Act is succeeded in the business by any person in the manner described in clause (a) of sub-section (1) or sub-section (4) of section 44, then such person shall, notwithstanding anything contained in this section, be liable to pay tax on the sales or purchases of goods effected by him on and after the date of such succession and accordingly nothing contained in the proviso to sub-section (2) shall apply to him in any year. (9) Any person who is not liable to pay tax under the foregoing, provisions of this section but has been voluntarily registered under the provisions of this Act shall be liable to pay tax from the date of effect of the certificate of registration duly granted to him and accordingly nothing contained in the proviso to subsection (2) shall apply to him in any year. 18. It is now well settled that in terms of Article 366(29A)(d) of the Constitution of India, transfer of right to use the goods is a deemed sale of goods and subject to Sales Tax/VAT. 19. Section 2(24) of the MVAT Act, defines sale to mean sale of g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary, except surmises. 22. Further, service tax is applicable on provision of services and for this purpose, service has been defined under Section 65B(44) of the Finance Act, 1994. Additionally, a declared service is defined under Section 66E(f) of the Finance Act, 1994 to include the following : transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods; 23. Transfer of right to use goods is excluded from the definition of service as well as declared service and hence, the same is not subject to service tax. Therefore, it is clear that a transfer of goods which does not involve a transfer of right to use, would be in the nature of a declared service and would be subject to service tax. Thus, only those cases where there is no transfer of right to use goods involved in a transfer of goods, service tax would be applicable. 24. Admittedly, the company (in liquidation) had provided the containers to the lessee on lease basis and recovered lease rental on which appropriate VAT at the rate of 12.5% was paid by the company (in liquidation). 25. Upon representations received, the Central Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me right to others. The activities outlined by the Apex Court, in our view, squarely applies to the case of the company (in liquidation). 28. In the present case, it is not in dispute that the company (in liquidation) had given the containers to the lessee on rental basis and possession and control was always with the lessee and the sole ground on which the demand is confirmed is that the company (in liquidation) was not owner of the containers. 29. For a transaction to be deemed sale there is no requirement of transfer of ownership and once it is not disputed that the containers are given on lease and possession and control is transferred, it is a deemed sale within the meaning of Article 336(29A)(d) of the Constitution of India and outside the purview of Finance Act, 1994. The singular distinction between an absolute transfer of goods and a transfer of right to use goods is that in case of the former, the transfer is absolute including passage of title, whereas in the case of the later, excluding passage of title, all other rights would ensue to the benefit of the user of the goods. The Hon ble Supreme Court in Aggarwal Brothers V/s. State of Haryana 1999 (9) SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollows: Period Turnover as per Audited Financials (Rs.) Rate of VAT VAT Paid (Rs.) 2015-16 1,25,07,056/- 12.50% 15,63,387/- Further in paragraph 10 of the impugned order, respondent no.3 has tabulated service tax liability of petitioner as follows: Period Taxable Value (Rs.) Rate of Service Tax (including Cess) % Servite Tax payable (including Cess) (Rs.) 2015-16 1,40,70,443/- 14.50% 20,40,2015/- The base figure of Rs.1,40,70,443/- taken by respondent no.3 in computing the service tax liability includes the value of VAT of Rs.15,63,387/- payable. Therefore, respondent no.3 has erred in taxing the tax component and arriving at the service tax liability of the company (in liquidation). Further, in the impugned order there is no discussion as to how service tax is leviable on the VAT component paid. Mr. Adik also agreed that service tax is ..... 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