2024 (1) TMI 137 - AT - Service Tax

Gas Genset lease constitutes deemed sale under Article 366(29A), not taxable service under supply of tangible goods

CESTAT Ahmedabad ruled in favor of appellant who leased Gas Genset equipment to a company. The tribunal held that the transaction constituted a deemed ... Classification of service - appellant had leased equipment called as “Gas Genset” to M/s. Gujarat Agrochem Ltd. during the material period along with legal right of possession and effective control - classifiable as an activity of supply of tangible goods for use or the leasing activity? - scope of agreement between the lessor and lessee - HELD THAT:- From the relevant clauses of the agreement, it is clear that during the lease period the right to possession and effective control is completely with the lessee and not with the lessor (appellant). It is also not disputed that the said transaction is the deemed sale in terms of Article 366 29 (A) of Constitution of India which is liable to State VAT - In the present case also the appellant considering the transaction as deemed sale discharged the VAT liability to the state Government. Therefore, the transaction which is a domain of VAT department, the same cannot be liable to service tax. In the case of GS. LAMBA AND SONS VERSUS STATE OF ANDHRA PRADESH [2011 (1) TMI 1196 - ANDHRA PRADESH HIGH COURT] Hon’ble Andhra Pradesh has held that The existence of goods is identified and the transit mixers operate and are used for the business of Grasim. Therefore, conclusively it leads to the only conclusion that the petitioners had transferred the right to use goods to Grasim. In the case of GIMMCO Ltd. [2016 (12) TMI 394 - CESTAT MUMBAI], Mumbai Tribunal has held that the transaction involved herein is “transfer of right to use” which is a deemed sale and not “supply of tangible goods for use” service. Under the identical set of facts it was viewed that the right of possession and effective control has been transferred particularly considering the fact that the lessor have paid the VAT considering the transaction as deemed sale in terms of Article 366 29 (A) of the Constitution of India. Since the same facts and issue involved in the present case, the ratio of above judgments are directly applicable in the present case also. The demand of service tax under tangible goods for use service in the present case is not sustainable - the impugned order is set aside - Appeal allowed. Issues Involved:1. Classification of the leasing activity under service tax.2. Transfer of possession and effective control.3. Applicability of VAT and service tax.4. Time-barred demand due to bona fide belief.Summary:1. Classification of Leasing Activity:The primary issue was whether the leasing of 'Gas Genset' by the appellant to M/s. Gujarat Agrochem Ltd. constituted a 'supply of tangible goods for use' service under Section 65(105)(zzzj) of the Finance Act, 1994, thereby attracting service tax. The department argued that since the ownership of the equipment remained with the lessor (appellant), the activity was taxable. However, the appellant contended that the right to possession and effective control was transferred to the lessee, making it a deemed sale liable to state VAT, not service tax.2. Transfer of Possession and Effective Control:The tribunal examined the lease agreement dated 07.09.2005, focusing on clauses indicating that the lessee had beneficial possession and effective control of the Gas Genset during the lease period. The tribunal concluded that the right to possession and effective control was indeed transferred to the lessee, aligning with the definition of a deemed sale under Article 366(29A) of the Constitution of India. This transfer excluded the transaction from the ambit of 'supply of tangible goods for use' service.3. Applicability of VAT and Service Tax:The appellant had paid state VAT on the transaction, supported by a Chartered Accountant's certificate. The tribunal referenced multiple judgments, including G.S. Lamba & Sons, Kalpataru Power Transmission Ltd., AIMS Pharma Pvt. Ltd., and GIMMCO Ltd., which held that transactions involving transfer of possession and effective control are deemed sales subject to VAT, not service tax. The tribunal reiterated that if VAT is paid on a transaction, it cannot be subjected to service tax under the 'supply of tangible goods for use' category.4. Time-Barred Demand:The appellant argued that the demand was time-barred as the issue was under litigation in various cases, and they had a bona fide belief that the transaction was a deemed sale liable for VAT. The tribunal did not explicitly address this argument in the final decision, focusing instead on the classification and applicability of taxes.Decision:The tribunal set aside the impugned order, ruling that the leasing of Gas Genset did not fall under 'supply of tangible goods for use' service and was not liable to service tax. The appeal was allowed in favor of the appellant.