Transfer of right to use goods took the lease outside service tax on supply of tangible goods.

Lease of power generating and heat recovery equipment was treated as a transfer of the right to use goods because the lessee had exclusive possession and effective control during the lease term, while the owner could not interfere or grant the same right to others. The arrangement also required the lessee to obtain permissions, arrange fuel and other facilities, and bear operational responsibilities, supporting deemed sale treatment under Article 366(29A)(d) and the VAT framework. As a transaction involving transfer of the right to use goods, it did not fall within the service tax category of supply of tangible goods without transfer of possession and effective control, and the demand was unsustainable.

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Issues: Whether lease of power generating and heat recovery equipment with associated terms amounted to a transfer of right to use goods and deemed sale, so as to fall outside the levy of service tax under the category of supply of tangible goods.

Analysis: The contract terms showed that during the subsistence of the lease the lessee had exclusive possession and the right to use the plant, while the owner could not interfere with that right. The lessee was required to obtain permissions, arrange fuel and other facilities, and bear responsibility for the plant in a manner consistent with effective control being with the lessee. Applying the test for transfer of right to use goods, the transaction satisfied the attributes of available goods, identified goods, legal right to use, exclusion of the transferor during the period of use, and inability of the owner to transfer the same right to others during that period. The nature of the transaction was therefore a deemed sale under Article 366(29A)(d) of the Constitution of India and under the VAT framework, and payment of VAT on the lease charges supported that characterisation. A transaction amounting to transfer of right to use goods does not answer the statutory description of supply of tangible goods without transfer of possession and effective control, either under the pre-negative list regime or under the declared services regime.

Conclusion: The lease transactions were not exigible to service tax as supply of tangible goods and the demand was unsustainable.

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