Transfer of possession and effective control kept bottle and crate rentals outside service tax, while limitation also defeated the demand.

Rental charges for returnable glass bottles and plastic crates used in supplying aerated water were outside service tax as supply of tangible goods because possession and effective control passed to customers, and the same arrangement was treated as a deemed sale liable to VAT. The demand also failed on limitation: the department had prior knowledge of the material facts, yet invoked the extended period without adequate basis. As a result, the service tax demand, with interest and penalty, could not be sustained.

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Issues: (i) Whether rental charges on returnable glass bottles and plastic crates used for supply of aerated water were liable to service tax as supply of tangible goods. (ii) Whether the demand was barred by limitation and invocation of the extended period was justified.

Issue (i): Whether rental charges on returnable glass bottles and plastic crates used for supply of aerated water were liable to service tax as supply of tangible goods.

Analysis: The bottles and crates were handed over to customers with possession and effective control, and the charges had already been subjected to VAT as consideration for transfer of right to use goods. Such transactions were treated as deemed sales under the constitutional and sales tax framework. The definition of supply of tangible goods applies only where possession and effective control are not transferred. The recorded facts and the accepted VAT treatment showed that the demand could not be sustained on merits.

Conclusion: The issue is decided in favour of the assessee and the rental charges were not liable to service tax.

Issue (ii): Whether the demand was barred by limitation and invocation of the extended period was justified.

Analysis: The department was aware of the relevant facts from the spot memo issued in 2014, yet the demand was pursued only much later for a period commencing in 2011-12. In the absence of any adequate explanation for the delay, the conditions for invoking the extended period were not satisfied.

Conclusion: The issue is decided in favour of the assessee and the demand was barred by limitation.

Final Conclusion: The service tax demand, along with the connected interest and penalty, could not be sustained and the assessee succeeded in the appeal.

Ratio Decidendi: A transaction is outside the scope of supply of tangible goods service where possession and effective control of the goods are transferred to the customer and the same transaction is already treated as a deemed sale liable to VAT; the extended period cannot be invoked without a valid basis when the department had prior knowledge of the material facts.

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