Transfer of right to use goods governs DG set hire, excluding service tax on supply of tangible goods.

Hiring of diesel generator sets was treated as a transfer of the right to use goods, because the hirers had exclusive use, possession and effective control during the contract period and bore the operational responsibilities. The presence of technicians and standard hire conditions did not negate that conclusion. As the arrangement fell within the deemed sale category under Article 366(29A)(d) and VAT was being discharged on the hire charges, the taxable service of supply of tangible goods under the Finance Act, 1994 could not apply. The service tax demands and related orders were therefore set aside.

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Issues: Whether the hiring of diesel generator sets amounted to transfer of the right to use goods as a deemed sale, or constituted taxable service of supply of tangible goods without transfer of possession and effective control.

Analysis: The agreements showed that the hirers had the exclusive right to use the DG sets during the contract period, bore the operational responsibilities, and were subject only to standard hire conditions. The presence of technicians or usage conditions did not negate transfer of possession and effective control. The transaction satisfied the settled tests for transfer of right to use goods, and the material also showed that VAT was being discharged on the hire charges. Under the Finance Act, 1994, the taxable service of supply of tangible goods applies only where possession and effective control are not transferred. Once the transaction is a deemed sale within Article 366(29A)(d) of the Constitution of India, service tax cannot be levied on the same supply.

Conclusion: The hiring transactions were held to be deemed sales involving transfer of the right to use goods, not taxable supply of tangible goods service, and the service tax demands could not survive.

Final Conclusion: The impugned demands and orders were set aside because the DG set hire arrangements fell on the sale side of the sale-service divide and were outside the service tax net.

Ratio Decidendi: A transaction amounts to transfer of the right to use goods, and not taxable supply of tangible goods, when the hirer obtains possession and effective control of the goods for exclusive use, especially where the transaction is treated as a deemed sale and subjected to VAT.

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