Equipment hiring with transferred possession and control cannot be taxed as service under Section 65(105)(zzzzh)

CESTAT Ahmedabad held that equipment hiring cannot be classified as "supply of tangible goods for use service" when right to possession and effective control transfers to the service recipient. The appellant hired equipment to clients who possessed and operated it with their own employees. Since VAT was paid treating it as deemed sale under Article 366(29A) of Constitution, service tax cannot be demanded per SC precedent in UFO Moviez India Limited. Appeals allowed, impugned orders set aside.

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Issues Involved:
1. Classification of the hiring of equipment under "supply of tangible goods for use services."
2. Applicability of VAT versus Service Tax on the transaction.
3. Admissibility of CENVAT credit on capital goods.

Summary:

Issue 1: Classification of Hiring of Equipment

The appellants are engaged in providing de-humidifiers on a hire basis. The department classified this under "supply of tangible goods for use services" taxable under Section 65 (105) (zzzj) of the Finance Act, 1994. The appellants argued that they have two modules for renting: one where the customer has complete possession and control, and another where the appellant retains control. For the first module, they paid VAT, considering it a deemed sale under Article 366 (29A) of the Constitution of India. The Tribunal found that since the possession and control were transferred to the customer, it does not fall under the taxable service category as per Section 65 (105) (zzzj). The Tribunal relied on several judgments, including UFO Moviez India Ltd., which clarified that if VAT is paid, service tax cannot be demanded.

Issue 2: Applicability of VAT versus Service Tax

The Tribunal emphasized that the service can only be classified under "supply of tangible goods for use services" if the right to possession and control is not transferred to the service recipient. In this case, since the appellants transferred possession and control to the customers and paid VAT, the transaction cannot be taxed under service tax. The Tribunal cited the Supreme Court's observation in UFO Moviez India Ltd., stating that where VAT is paid, service tax cannot be claimed.

Issue 3: Admissibility of CENVAT Credit on Capital Goods

The Tribunal also addressed the issue of CENVAT credit on capital goods. It found that the appellants were eligible for CENVAT credit as the equipment was used for providing output services. The Tribunal noted that the appellant had been paying VAT since 2006 and had disclosed CENVAT credit on capital goods in their returns. The Tribunal concluded that there was no suppression of facts and set aside the demand for CENVAT credit on merit and limitation.

Conclusion:

The impugned orders were set aside, and the appeals were allowed with consequential relief. The Tribunal ruled that the hiring of equipment under the first module, where possession and control were transferred to the customer, does not fall under "supply of tangible goods for use services" and is not subject to service tax. The appellants were also entitled to CENVAT credit on capital goods.

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