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TMI Blog2025 (1) TMI 939X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. 3. On the other hand, Revenue has vehemently opposed the argument of the appellant on the grounds that bare perusal of contract between the appellant and MPT would indicate that there has not been any transfer of right to possess or effective control and therefore, the activity is rightly classifiable under STG. Learned AR has taken us through the contract between the appellant and MPT and invited attention to various clauses based on which, applying the ratio of conditions stipulated in the judgment of Bharat Sanchar Nigam Ltd Vs Union of India [2006 (2) STR 161 (SC)], which would constitute transfer of right to use goods or otherwise, submits that they are not actually transferring the right to possession or effective control. They have also relied on the case of M/s KP Mozika Vs Oil and Natural Gas Corporation Ltd [2024 (388) ELT 11 (SC)], wherein, the Hon ble Supreme Court, after considering various judgments, including BSNL (supra) held that the five conditions laid down by Dr. A.R. Laxmanan, J. in case of BSNL would have to be tested in relation to the contract between the parties to come to the conclusion whether the contract will be covered by sub- clause (d) of clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, the contract is for providing the services of berthing and unbearthing of vessels with the help of tug sigma and in the absence of the tug sigma, the same services have to be provided using a different tug. Thus, there are no goods available for delivery. 2. (b) there must be a consensus ad idem as to the identity of the goods No The agreement is for providing of services and not delivery of goods as enumerated above. There are no goods for delivery but the agreement is for delivery of services using the tug sigma and in the absence of tug sigma, the services are to be delivered using a different tug. 3. (c) the transferee should have a legal right to use the goods- consequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee No The legal consequences are being born by the contractor (transferor) and the transferee is indemnified against any losses or damages which his evident from clause d and clause u of the contract. d. The contractor shall insure the said Tug for all risk in which the Board shall not be liable against third party claims. A copy of the risk insurance policy shall be deposite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Century Finance Corporation Ltd. Anr. Vs. State of Maharashtra [(2000) 6 SCC 12] i) Commissioner of Service Tax, Ahmedabad Vs. Adani Gas Limited [2020 SCC Online SC 682 = 2020 (40) G.S.T.L. 145 (S.C.)] Para 32 Para 33 are reproduced below:- 32. The view taken by Dr. A.R. Laxmanan, J. has been consistently followed thereafter by this Court in various decisions. In the case of Great Eastern Shipping Company Limited, Paragraph 97 of the view expressed by Dr. A.R. Laxmanan, J. was quoted with approval. A Bench of three Hon ble Judges of this Court in the case of Commissioner of Service Tax, Ahmedabad v. Adani Gas Limited [2020 SCC Online SC 682 = 2020 (40) G.S.T.L. 145 (S.C.) = [2020] 118 taxmann.com 567 (SC)] quoted Paragraph 97 of the view expressed by Dr. A.R. Laxmanan, J. with approval. In fact, in Paragraph 17, the Bench observed that the tests laid down in Paragraph 97 of the decision in the case of BSNL have been applied to determine whether the transaction involved the transfer of the right to use any goods under sub-clause (d) of clause (29A) of Article 366 of the Constitution of India. 33. In the case of Quick Heal Technologies Ltd., in Paragraph 46, the tests laid down by D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he identity of the goods is shown the transaction is exigible to tax. 53.9 The locus of the deemed sale, by transfer of the right to use goods, is the place where the relevant right to use the goods is transferred. The place where the goods are situated or where the goods are delivered or used is not relevant. Thus, to decide the controversy involved in this group of appeals, the contract between the parties will have to be tested on the touchstone of the five tests laid down by Dr. A.R. Laxmanan, J. in the case of BSNL. Thus, the contract will be covered by sub-clause (d) of clause (29A) of Article 366, provided all the five conditions laid down are fulfilled. This Court has made a distinction between transferring the right to use and merely a license to use goods. In every case where the owner of the goods permits another person to use goods, the transaction need not be of the transfer of the right to use the goods. It can be simply a license to use the goods which may not amount to the transfer of the right to use. 6. Learned Advocate for the appellant has also relied on five conditions stipulated in the BSNL judgment to buttress their argument that there has been clearly a tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll agree to provide and let the motor Tug SIGMA (hereinafter called the said Tug ) and the Board shall hire the said Tug subject to the following conditions namely . (t) The said tug shall be made available to the use of the Deputy Conservator at all times of the day and night. Distinction (i) The goods in the case of K. P. Mozika are not identified in as much as any crane or vehicle/equipment of technical specification can be used. However, in the case of the Appellant, the agreement is only for use of specified goods i.e., motor tug SIGMA . Further, in the case of K. P. Mozika, there is a Specific exclusion in scope of work that there is no transfer of right to use of the vehicle. However, there is no such clause in the agreement of the Appellant with MPT. 2. Para 34 of K. P. Mozika (iii) The operational staff, such as driver, crane operator, rigor-slinger, khalasi, cleaner, etc. as specifically mentioned in clause 8.17 and 8.18 shall be provided by the contractor. The crew must operate the cranes with requisite safety accessories, such as safety shoes, gloves, safety helmets, etc. The contractor shall provide these safety accessories at his own cost and shall be replaced by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable to the use of the Deputy Conservator at all times of the day and night. Distinction (i) In the case of K.P. Mozika, there are restrictions with respect to hours during which the cranes can be used with prescribed break times or time for maintenance off. However, the case of the Appellant, the tugs are available for use by MPT at all times i.e. 24*7 without any restriction. The MPT authorities can use the tugs for any number of hours in a day or keep the tug idle. The Appellant does not have any control over how MPT operates the tugs. The said restriction is present in the case of KP Mozikafor the reason that ONGC is only interested in the service of work carried out by the cranes rather than the crane standalone. However, there is no such clause in the agreement of the Appellant since once tugs are given, they are entirely beyond the control of the Appellant. 4. Para 34 of K. P. Mozika (vi) The contractor must make adequate and proper arrangements for fuel, lubricants and other consumables, etc., in relation to the cranes and other items. The contractor shall look after the repair and maintenance of the cranes Sea Sparkle agreement (f) The Board shall provide and pay for fuel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and crew of the tug. Distinction In the case of K. P. Mozika, only the contractor is liable to indemnify and ONGC would not be liable at all. Further, in K. P. Mozika only the insurance of the contractor covered the goods. However, in the instant case, though the Appellant is liable to insure the Tug, during the time the tug is engaged in duties at the instructions of the deputy conservator, tug shall enjoy the same protection and indemnity available to tugs owned by MPT. Thus, when the tugs are used by MPT, the protection and indemnity of MPT shall also extend to the subject tug as if they are the tugs owned by MPT. In the case of K. P. Mozika, the contractor is providing services by indemnifying ONGC in case of accidents. However, in the Appellant s case, once the tug is given, the tug also enjoys the protections and indemnity as if it is the tug of MPT. The reason being in the present case, there is transfer of effective control and possession, therefore the protection and insurances available to the tug of MPT are also extended to the SIGMA tug. However, in the case of K. P. Mozika, there is no transfer of possession of cranes. Accordingly, it was held in K. P. Mozika that B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of loss of good in the trailer. However, since the contractor was in control of the trailer, he was responsible to indemnify ONGC. Therefore, it was held in the case of K. P. Mozikaat Para 38 that the test (c) of BSNL was not satisfied in para 38 of the decision. 9. Para 39 of K. P. Mozika In this case, the contract was for operating tank trucks to deliver petroleum products at specified rates. The salient features of the contract are as under : (c) IOCL did not guarantee any minimum turnover, whether daily, monthly or annually, during the contract period and therefore, the contractor will not be entitled to take ideal charges or minimum charges from IOCL; Sea Sparkle No such clause for payment based on transportation. In fact, the payment of fixed per day irrespective of time and manner in which it was used during the contract period. Distinction (i) In the case of K. P. Mozika, the contract is only for use of trucks for delivery of petroleum product and not the tank trucks stand alone. In the case of K. P. Mozika, there is no fixed payment for hiring of trucks. Therefore, the payment is based on transportation. However, in the case of the Appellant, regardless of use or not, MPT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the records. Further, since both the appeals have similar facts and issues, we intend to decide both appeals by way of common order. 11. The following issues are required to be decided in the present appeals:- A. 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. B. 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. (A) 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 not liable to Service Tax:- 12. The core issue, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e conclusion that the contract did not specify all the parameters/tests as laid down by Dr. A.R. Laxmanan, J., in BSNL case. Before we proceed further, it would be relevant to quote the provisions of Section 65(105)(zzzzj) of the Finance Act:- (zzzzj) to any person, by any other person in relation 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. [Emphasis supplied] 14. Therefore, whenever there is any service provided in relation to STG without transferring any legal rights of possession or effective control, it would be covered within the scope of Service Tax. However, wherever there is a transfer of right to use, it would be subjected to VAT/Sales Tax, as deemed sale of goods. Therefore, whether a transaction involves transfer of right to possess and effective control is a question of fact and needs to be decided based on the terms of contract and other material evidence. 15. The contract dt.25.05.2007 has been titled as hire agreement where it was mutually agreed by both the parties that the appellant will provide and let the motor tug sig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to the transferee:- As per the department, the legal consequences are being borne by the contractor/appellant and the transferee has been indemnified against any losses or damages, which is evident from clause d and u of the contract, where MPT has clearly mentioned that they would not be liable against third party claims and also that if the tug is lost, the board shall only pay for hire up to and including the date of the loss. Therefore, since MPT is only paying hire charges and not for loss of the tug, hence, there are no legal consequences on the transferee i.e., MPT. On the other hand, the appellants are submitting that MPT has legal right to use the goods at all times, as would be obvious from clauses t and d , which state that the risk insurance shall be deposited with Deputy Conservator and also the fact that the contractor has the same protection and indemnities available to tugs owned by MPT, while on duty and therefore, they have the legal right to use the tug along with legal consequences. d) For the period during which the transferee has such legal right, it has to be the exclusion to the transferor this is the necessary concomitant of the plain language of the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there has not been any legal transfer of rights to use nor there is any transfer of effective control. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , they are not free to take any action directly on master and can only complain to the appellant who would undertake the investigation and take appropriate action. Thus, the MPT has no control over the master to the extent of taking any direct disciplinary action and it is being fully controlled by the appellant. Thus, in terms of clauses g h , the effective control over the crew and master is by the appellant and not by MPT, who have been merely authorized to use the said tug by the appellant subject to certain operating conditions. 21. There are certain other clauses like clause o , where in the case of emergency, the tug is required to assist any such operation for which necessary port clearance will be arranged by the MPT and the contractor will be required to post MPT s crew on board the tug, if required to comply with the regulations. This would obviously mean that in relation to certain operations, this tug and its complement of master and crew cannot be used as such by MPT and it may require the presence of crew of MPT for meeting certain statutory regulations. Therefore, if there is transfer of legal right to use as well as effective control, there would not have been any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use. Therefore, it cannot be said that this hire agreement is involving deemed sale and therefore, liable to VAT. We have also perused the invoices on monthly basis by the appellant to the MPT, where the description shown is monthly remuneration for the services of the tug MV Sigma at Mormugao Port from 1200 hrs to 1200 hrs (31 days), which further supports that the remunerations were in the nature of hiring charges and were being received on a monthly basis. 24.2 Therefore, 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. Thus, since it is not considered as deemed sale, there is no question of payment of VAT. Therefore, it would be a service and since it satisfies the criteria for classification under STG, it is rightly classifiable thereunder. Reliance placed on circular is also misplaced as they are not of binding nature and merely clarifications, as they clarify that supply of tangible goods for use and leviable to VAT as deemed sales will not come under the purview of Service Tax. Conversely, if the transaction cannot be treated as deemed sale, it would come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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. 27. Whereas, in terms of POTR, 2011 and in this case, since it is a continuous supply, the event is to be determined in accordance with Rule 6 of POTR, which, inter alia, provides that in case of continuous supply, the point of taxation shall be the time when the invoice for service provided or to be provided is issued. In this regard, it is observed that as per clause j , the MPT is required to pay on monthly basis at a specified ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also canvassed that there has not been any deliberate omission and intent to evade and it was only due to bonafide belief that no Service Tax is imposable on the activity of letting out of tug on hire basis, which was on account of clarification issued by AAR, after perusing the terms of the contract entered into between MPT and the appellant, that VAT is imposable on the said activity. They have also tried to argue that there was issue of interpretation of law also and therefore, relying on various case laws, no penalty, etc., was imposable on them. We find 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 go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and relied on catena of judgments of Hon ble Supreme Court on this issue while deciding the matter and holding that the contract would not be that of deemed sales as the contract do not provide for transfer of the rights to use the goods made available to the person who is allowed to use the same. In view of the same, we are not examining the applicability or relevance of the other case laws relied upon by the appellant. 33. On the issue whether Service Tax is leviable where the VAT is paid, we find both operate under different statute. While the payment of VAT may suggest that transaction is one where deemed sale might be involved but there is nothing to deter the authority working under the Finance Act to examine the same transaction to find out whether there is any deemed sale as such. Thus, while both levies are mutually exclusive but the facts need to be ascertained to come to conclusion whether deemed sale is involved or otherwise. A mere discharge of VAT, per se, would not absolve them from the leviability, if the said discharge of VAT is not tenable in the facts of the case. They have placed reliance on the case of Imagic Creative (P.) Ltd. Vs. Commissioner of Commercial Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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