Transfer of right to use goods excludes service tax on leased equipment when possession and effective control pass to the lessee.

Leasing of a gas genset was treated as a transfer of the right to use goods where the contract gave the lessee beneficial possession, exclusive use and effective control during the lease period. On that basis, the transaction was characterised as a deemed sale under Article 366(29A)(d) and VAT treatment applied. The service tax entry for supply of tangible goods for use was held inapplicable because it covers only arrangements in which possession and effective control remain with the supplier. The stated principle is that a transaction already falling within the VAT characterisation cannot be reclassified for service tax on the same facts.

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Issues: Whether leasing of gas genset with transfer of possession and effective control constituted a transfer of right to use goods as a deemed sale under Article 366(29A)(d) of the Constitution of India, or was taxable as supply of tangible goods for use service under Section 65(105)(zzzj) of the Finance Act, 1994.

Analysis: The agreement was examined as a whole and its clauses showed that during the lease period the lessee had beneficial possession, exclusive use, and effective control over the equipment. The transaction was treated as a deemed sale on which VAT had been paid. In such circumstances, the taxable event under the service tax entry for supply of tangible goods for use, which applies only where right of possession and effective control are not transferred, was not attracted. The reasoning was supported by the settled principles that transfer of the right to use goods, not mere delivery or physical custody, is the relevant test, and that a transaction falling within VAT cannot be again subjected to service tax on the same characterisation.

Conclusion: The leasing transaction was a transfer of the right to use goods and not a taxable supply of tangible goods for use service, so the service tax demand was unsustainable.

Ratio Decidendi: Where a contract transfers exclusive possession and effective control of goods to the user, the transaction is a deemed sale under Article 366(29A)(d) and falls outside the service tax levy on supply of tangible goods for use.

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