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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 ..... perienced 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Goods giving rise to VAT payment. 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 cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Demobilisation" charges for which shall be borne by the Contractor." 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 liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited [2022 SCC Online SC 976] g) Imagic Creative (P.) Ltd. Vs. Commissioner of Commercial Taxes & Ors. [(2008) 2 SCC 614] h) 20th 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parties would determine the nature of the contract. Such agreement has to be read as a whole to determine the nature of the transaction. If the consensus ad idem as to the 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 righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase or transfer or rights, for use of the vehicle/equipment, by the contractor to ONGC. Sea Sparkle agreement It is mutually agree by and between the parties hereto that the Contractor shall 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 cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to change. There shall be four days' maintenance off for the cranes; Para 37 of K. P. Mozika (b) The trailer shall be available for 26 days in a calendar month. The normal working hours will be 12 hours; Sea Sparkle (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) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Deputy Conservator, the said tug shall enjoy the protection and indemnities available to the tugs owned by the Mormugao Port Trust provided under bye-laws of Mormugao Port Trust, subject to the damage occurred is not due to the failure of the tug or due to the error committed by the master 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any loss of material provided by ONGC during transportation. However, in the case of the Appellant, there is no such clause for loss during transportation. If theagreement in the case of K. P. Mozika was only for transfer of effective control and possession, there is no question of contactor to bare cost on account 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 cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring this transaction as deemed sale and therefore, there is no case of payment of Service Tax. They have relied upon certain clarifications issued by CBEC. Reliance is placed on Circular No.96/7/2007-ST dt.23.08.2007 (Reference Code 036.03/23-8-07) and letter from Joint Secretary (TRU) dt.29.02.2008 (4.4.3) 10. Heard both sides and perused 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) Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the right to use" and not merely a licence to use the goods; e) Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others." 13. Thereafter, after examining the provisions of all the conditions of the contract, including scope of work/contract, the Hon'ble Court came to the 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 sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g sigma, the services are to be provided using a different tug. Whereas, the appellants have submitted that the contract is very clear that the goods identified was motor tug 'sigma', at the time of signing of contract. c) The transferee should have a legal right to use the goods - consequently all legal consequences of such use including any permissions or licenses required therefor should be available 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred the said right to some other person. 17. Therefore, once the arguments and counter arguments are taken into consideration, what emerges is that whether the contract dt.25.05.2007 is a hire agreement or it is an actual transfer of right to use the tug along with its effective control to MPT. If all the clauses are read together and especially some of the clauses cited by the Revenue in their support, it would appear 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 certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion but on the contractor, who has to bear the consequence in case of any misappropriation by the crew. In other words, the control over the crew and the master is being exercised by the appellant, who is required to face the consequences and not the MPT. 20. While it is true that in terms of clause 'h', the master is required to be under the orders and direction of MPT as regards operation of the said service, in terms of clause 'i', 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oing paras, because of various conditions, there has not been any absolute transfer of right to use and at the same time, though some of the operational controls have been provided to the user of the tug i.e., MPT, but the effective control on the tug as well as its crew are continuing with the appellant only. Therefore, 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. 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 VA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Anr (supra) clarifies that where goods are available, the transfer of the right to use takes place when the contract in respect thereof is executed, the right is vested in the lessee; and that situs of the taxable event of such tax (Sales Tax or VAT, as the case may be) would be the transfer, which legally transfers the rights to use goods." 26. Therefore, 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., 01.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and effective control and therefore, cannot be treated as sale of goods rather it should be treated as service and thus, liable to Service Tax under the category of 'Supply of Tangible Goods'. The allegation is that this aspect of supply of tug and receipt of hire amount on monthly basis etc., were never reflected in their ST3 returns and therefore, if the audit could not have been conducted, the fact of non-payment of Service Tax would not have come to the light. However, the appellants have 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion in KP Mozika case (supra), we find that this contract is that of contract for hiring the tug and does not involve transfer of right to possess and effective control to MPT. We also find certain case laws of Hon'ble Supreme Court relied upon by the appellant viz., Great Eastern Shipping Co Ltd Vs State of Karnataka (supra), 20th Century Finance Corporation Ltd. & Anr. Vs. State of Maharashtra (supra), etc., which have been considered by Hon'ble Supreme Court in KP Mozika case. In fact, it has referred 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 work ..... X X X X Extracts X X X X X X X X Extracts X X X X
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