By TIOL News Service

MUMBAI, MAY 15, 2013: THE appellant is inter alia engaged in renting of earthmoving equipment such as Caterpillar, Excavators, etc to various customers. The appellant did not discharge any service tax liability on the said activity. The department was of the view that the activity of renting of earthmoving equipment would come under the purview of service tax under the purview of service tax under the taxable service category of "business auxiliary service" for the period prior to 16-5-2008 and under the category of "supply of tangible goods for use" with effect from 16-5-2008 and accordingly issued a notice demanding service tax amounting to Rs. 2,13,10,930/- for the period 2005-06 to 2009-10.

The CCE, Nagpur confirmed the demand of service tax under the category of "supply of tangible goods for use" for the period from 16-5-2008 amounting to Rs. 67,39,694/- along with interest and penalties.

Before the CESTAT, the appellant submitted the following for seeking a Stay -

+ The activity undertaken is leasing of the machinery/equipment. The appellant is discharging VAT liability on the consideration received under the Maharashtra value Added Tax Act, 2002 under section 2(24)(a)(iv) under the category of "the transfer of right to use". The transaction involved is one of "deemed sale" and, therefore, service tax cannot be levied on the same transaction under the category of "supply of tangible goods for use".

+ At the time of introduction of service tax levy on "supply of tangible goods for use", the Finance Minister in para 156 of the Budget Speech for the year 2008-09 had clearly stated that the levy would fall on "right to use goods, in case where VAT is not leviable". In the Budget instructions vide Circular MF (DR) 224/1/2008-TRU dated 29-2-2008, it was clarified that "supply of tangible goods for use and leviable to VAT/sales tax as deemed sale of goods, is not covered under the scope of the proposed service". Hence service tax liability is not attracted in the appellant's case.

+ In the service tax provisions effective from July 2012, service has been defined in Section 65B (44) and as per the said definition, service does not include an activity which constitutes transfer, delivery or supply of any goods which is deemed to be sale within the meaning of clause (29A) of articles 266 of the Constitution.

+ In the leasing transaction undertaken by the appellant, the legal right of possession or effective control remains with the lessee and the transaction is only "transfer of right to use".

+ In the case of G.S. Lamba & Sons vs. State of A.P - (2012-TIOL-49-HC-AP-CT), in a case relating to hiring of Transit Mixers, it is held that the transaction amounts to transfer of right to use goods and leviable to sales tax.

The Revenue representative refuted the contentions made by the appellant and submitted the transaction is one of supply of tangible goods for use; the effective possession and control of the equipment lies with the appellant as is evident from the agreement dated 20/10/2009 entered into with one of their customers M/s Avtar & Company; that the appellant provides one skilled operator for the operation of the equipment at site; that routine maintenance and repairs of the equipment will be carried out by appellant's personnel only and the hirer of the equipment has to spare the equipment for routine maintenance as and when required by the appellant; that the hirer can use the equipment only for the purpose it is hired and cannot remove the equipment from the site without the written consent of the appellant; that the hirer has to provide free access and facilities to the appellant's personnel to enable them to inspect the equipment at any time; that the title and ownership of the equipment vests with the appellant and the hirer cannot claim any proprietary rights, title or interest in the equipment.

It is further submitted that the Senior Manager of the appellant's firm in his statement dated had admitted that the appellant did not transfer the title of rented machinery to their client and the legal possession of the equipment remained with the appellant. Referring to the CBEC Circular dated 29/02/2008 which clarified that "transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as ‘service', it is submitted that since in the present case, effective control, possession and custody of the equipment remained with the appellant, the contract is a service contract and hence the appellant is liable to pay service tax under the category of "supply of tangible goods for use".

The Bench noted thus -

"5.2 Revenue's contention is based on the clauses in the agreement relating to restrictions of use by the lessee, provision of skilled operator by the lessor and maintenance and repairs of the equipment by the lessor. Merely because restrictions are placed on the lessee, can it be said that there is no right to use by the lessee? Such a view does not appear to be tenable when we read carefully the provisions of the agreement. Clause 13 of the agreement provides for Hirer's Covenants. As per cl. 13.1, the hirer will use the equipment only for the purpose it is hired and shall not misuse or abuse the equipment. Similarly in clause 13.3, it is provided that the hirer will ensure the safe custody of the equipment by providing necessary security, parking bay,, etc, and will be responsible for ay loss or damage or destruction. Cl. 13.5 provides that the hirer shall be solely responsible and liable to handle any dispute entered with any third party in relation to the use and operation of the equipment. Further c.14 dealing with title and ownership specifically provides that "equipment is offered by GMMCO Ltd. only on ‘rights to use' basis". Cl. 15 relating to damages provides for compensation to be paid by the hirer to the appellant in case of damage to the equipment during the period of use. These responsibilities cast on the hirer clearly show that the right of possession and effective control of the equipment rest with the hirer; otherwise the hirer cannot be held responsible for misuse/abuse, sage custody/security, liability to settle disputes with third parties in relation to use etc. Further cl. 4.3 of the agreement provides for charging of VAT at 12.5% on the monthly invoice value which shall be payable by the hirer. These terms and conditions stipulated in the agreement, in our view, lead to the conclusion that the transaction envisaged in the agreement is one of "transfer of right to use" which is a deemed sale under section 2(24) of the Maharashtra value Added Tax, 2002. The Finance Minister's speech and the budget instructions issued by the CBEC also clarify that if VAT is payable on the transaction, then service tax levy is not attracted."

Thereafter, the CESTAT referred to the Andhra Pradesh High Court decision in G.S.Lamba case cited by the appellant and concluded that applying the ratio of the said decision to the facts of the present case, the transaction involved would aptly be one of "transfer of right to use" which is a deemed sale and not "supply of tangible goods for use service".

Holding so, the Bench observed that it is of the prima facie view that the appellant had made out a strong case in their favour and accordingly granted a stay in the matter.

The Stay petition was allowed.

(See 2013-TIOL-734-CESTAT-MUM)