Composite service transactions must be properly characterised before VAT can be levied where service tax may already apply.

VAT could not be levied on terminalling services without first determining whether the same transaction had already suffered service tax, because a composite arrangement cannot be artificially severed beyond the recognised constitutional and statutory scheme. The assessment was incomplete on this issue and required reconsideration of the effect of prior service tax payment. The finding that the terminalling and storage arrangement amounted to a transfer of right to use goods was also not upheld, as the agreement's non-exclusive character and the nature of the facility needed proper factual and legal examination. The assessment under the head of terminalling services was set aside and remanded for fresh consideration.

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Issues: (i) Whether VAT could be levied on terminalling services when service tax had already been discharged on the same transaction; (ii) Whether the terminalling and storage arrangement amounted to a transfer of right to use goods so as to attract VAT under the Tamil Nadu Value Added Tax Act, 2006.

Issue (i): Whether VAT could be levied on terminalling services when service tax had already been discharged on the same transaction.

Analysis: The assessment order did not address the contention that service tax had already been paid on the very same service transaction. The relevant classification under the Finance Act, 1994 and the Central Board circular on storage and warehousing required consideration, as did the legal principle that a composite transaction cannot be artificially severed beyond the specific category recognised under Article 366(29A) of the Constitution of India. The omission to examine whether the same activity was being subjected to both levies rendered the assessment incomplete on this head.

Conclusion: The levy of VAT on the terminalling service could not be sustained without examining the effect of prior service tax payment, and the issue was decided in favour of the petitioner.

Issue (ii): Whether the terminalling and storage arrangement amounted to a transfer of right to use goods so as to attract VAT under the Tamil Nadu Value Added Tax Act, 2006.

Analysis: The nature of the agreement, its non-exclusive character, the physical configuration of the facility, and the definition of storage and warehousing under the Finance Act, 1994 were material to determine whether there was any transfer of the right to use goods. The assessment also proceeded on an incomplete appreciation of the statutory and factual position, including the Central Board circular and the distinction between service use and transfer of taxable goods. The finding that the facility constituted a transfer of right to use goods required reconsideration on a proper factual and legal basis.

Conclusion: The finding of transfer of right to use goods was not upheld, and the issue was decided in favour of the petitioner.

Final Conclusion: The assessment under the head of terminalling services was set aside and the matter was remanded for fresh consideration in accordance with law.

Ratio Decidendi: Where the same commercial transaction is prima facie taxable as a service and is also sought to be taxed as a sale of goods, the authority must first determine the true nature of the arrangement and cannot impose VAT without addressing the statutory character of the service and the prohibition against artificial severance of a composite contract beyond the constitutional scheme.

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