Transfer of right to use goods defeated service tax on hired earthmoving equipment; pre-16.05.2008 demand remanded.

Hiring of earthmoving equipment was treated as a transfer of right to use goods, because the agreement gave the hirer custody, responsibility for safe use, liability for misuse and damage, and VAT was paid on the transaction. On those features, possession and effective control were found to have passed to the hirer, so the activity fell within deemed sale principles and not the taxable service of supply of tangible goods for use. The pre-16.05.2008 demand was not finally sustained on the existing record, and the matter required fresh consideration only for that period on the alternative contention that the activity was not business auxiliary service.

---

---

Issues: (i) Whether hiring of earthmoving equipment on the terms of the agreement amounted to transfer of right to use goods and, therefore, was outside the taxable service of supply of tangible goods for use; (ii) Whether the demand for the period prior to 16.05.2008, dropped by the adjudicating authority on the footing that the service was taxable only from that date, required reconsideration.

Issue (i): Whether hiring of earthmoving equipment on the terms of the agreement amounted to transfer of right to use goods and, therefore, was outside the taxable service of supply of tangible goods for use.

Analysis: The definition of taxable service covered only supply of tangible goods without transferring right of possession and effective control. The agreement showed that the hirer had custody, responsibility for safe use, liability for misuse and damage, and payment of VAT on the transaction. These features indicated that possession and effective control had passed to the hirer. The transaction was thus a transfer of right to use goods and fell within the concept of deemed sale under the VAT law. The levy of service tax under the category of supply of tangible goods for use was therefore not attracted.

Conclusion: The issue was decided in favour of the assessee and against the Revenue.

Issue (ii): Whether the demand for the period prior to 16.05.2008, dropped by the adjudicating authority on the footing that the service was taxable only from that date, required reconsideration.

Analysis: The adjudicating authority had dropped the pre-16.05.2008 demand mainly because the activity was treated as supply of tangible goods for use, a levy introduced only from that date. Since the finding on the main taxable category did not survive, that basis for dropping the demand ceased to exist. The adjudicating authority had not recorded a detailed finding on the alternative contention that the activity was not business auxiliary service. The matter therefore required fresh consideration on that limited period.

Conclusion: The Revenue's appeal was allowed by remand for fresh adjudication limited to the demand for the period prior to 16.05.2008.

Final Conclusion: The classification as supply of tangible goods for use was negatived, the assessee succeeded on that issue, and the pre-16.05.2008 demand was sent back for reconsideration on the alternative basis of taxation.

Ratio Decidendi: Where the agreement and surrounding obligations show that the hirer has possession and effective control over the goods, the transaction is a transfer of right to use and not a taxable supply of tangible goods for use.

---