Renting of DG Sets not considered "Supply of Tangible Goods Service" under Finance Act. Sale subject to VAT.

The Tribunal concluded that the renting of DG Sets did not fall under the category of "Supply of Tangible Goods Service" as defined in the Finance Act, 1994, as the possession and effective control of the DG Sets had been transferred to the client. The transaction was deemed a sale subject to VAT under the Gujarat Value Added Tax Act, 2003, and was not liable for service tax. Additionally, the Tribunal found that the appellant acted in good faith, leading to the demand being hit by limitation. The appeals were allowed, and the decision was pronounced on 12.09.2023.

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Issues Involved:
1. Classification of the rental supply of DG Sets.
2. Applicability of VAT vs. Service Tax.
3. Transfer of possession and effective control.
4. Limitation period for tax demand.

Summary:

1. Classification of the Rental Supply of DG Sets:
The primary issue was whether the renting of DG Sets by the appellant falls under the category of "Supply of Tangible Goods Service" as defined in clause 65(105)(zzzzj) of the Finance Act, 1994. The appellant argued that the DG Sets were supplied for a definite, non-temporary period, and the responsibility for infrastructure, installation, and operation was entirely on the client. The Tribunal concluded that the right to use, possession, and effective control of the DG Sets had been transferred to the client, thus not classifying the service under "Supply of Tangible Goods Service."

2. Applicability of VAT vs. Service Tax:
The appellant contended that the transaction was subject to VAT under the Gujarat Value Added Tax Act, 2003, and referred to Article 366(29A) of the Constitution of India, which deems such transactions as sales. The Tribunal noted that the appellant was registered under GVAT and was paying VAT on the supply of DG Sets. The CBEC Circular No. 334/1/2008-TRU clarified that transactions subject to VAT are not liable for service tax. The Tribunal upheld this view, confirming that the supply of DG Sets was a deemed sale and not a service.

3. Transfer of Possession and Effective Control:
The Tribunal examined the terms of the agreement between the appellant and the client, which indicated that the DG Sets were supplied for a fixed period and were permanently installed at the client's premises. The client had full control over the operation and usage of the DG Sets. The Tribunal found that providing an operator and maintenance services did not affect the transfer of possession and control. Thus, the supply did not fall under the definition of "Supply of Tangible Goods Service."

4. Limitation Period for Tax Demand:
The appellant argued that the larger period for tax demand was not applicable as the issue was contentious, and they acted in good faith. The Tribunal agreed, noting that the appellant had disclosed all relevant information and paid VAT, which indicated no intent to evade tax. Thus, the demand was also hit by limitation.

Conclusion:
The Tribunal set aside the impugned orders and allowed the appeals, concluding that the supply of DG Sets was not liable to service tax but was subject to VAT as a deemed sale. The decision was pronounced in the open court on 12.09.2023.

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