Aircraft leasing and supply of tangible goods: tax levy fails where possession and effective control pass to the user.

A lease of aircraft is not taxable as Supply of Tangible Goods Service where the lessee enjoys possession, practical control and the right to use the aircraft, because the levy applies only when the supplier retains legal possession and effective control; the service tax demand on that basis was set aside. Penalties relating to non-inclusion of TDS in taxable value and wrongful CENVAT credit on motor vehicles were also deleted, as the tax dues had been paid with interest and the record showed a bona fide view without mala fide intent. The appeals were allowed with consequential relief.

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Issues: (i) Whether leasing of aircraft by the foreign lessor to the appellant amounted to "Supply of Tangible Goods Service" and attracted service tax on reverse charge basis; (ii) whether penalties were sustainable in respect of non-inclusion of TDS amount in the taxable value and wrongful availment of CENVAT credit on motor vehicles.

Issue (i): Whether leasing of aircraft by the foreign lessor to the appellant amounted to "Supply of Tangible Goods Service" and attracted service tax on reverse charge basis.

Analysis: The levy under the category of supply of tangible goods applies only where goods are made available for use without transferring the right of possession and effective control. The lease terms showed that the appellant operated the aircraft with its own crew, maintained and repaired it at its own cost, and had the practical and legal control required for its use. The transaction therefore answered the test of transfer of right to use, and not mere supply for use. The Board circulars also supported this distinction by limiting the taxable service to cases where legal right, possession, or effective control is not transferred.

Conclusion: The lease of aircraft was not taxable as Supply of Tangible Goods Service, and the service tax demand on that footing was set aside.

Issue (ii): Whether penalties were sustainable in respect of non-inclusion of TDS amount in the taxable value and wrongful availment of CENVAT credit on motor vehicles.

Analysis: The tax liabilities arising from these two issues had already been discharged with interest, and the record showed that the infractions occurred under a bona fide view regarding valuation and credit eligibility. In the absence of mala fide intent, the penal provisions invoked for these demands were held to be excessive and unwarranted.

Conclusion: The penalties imposed in relation to the TDS valuation issue and the CENVAT credit issue were set aside.

Final Conclusion: The appeals succeeded, the substantive service tax demand on aircraft leasing was quashed, and the connected penalties were deleted, with consequential relief as per law.

Ratio Decidendi: A lease transaction is not taxable as supply of tangible goods unless the supplier retains possession and effective control; where the user enjoys the right to use the goods with possession and control, the transaction is a deemed sale and not a taxable service.

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