Transfer of possession and effective control kept equipment hire outside supply of tangible goods service, nullifying tax demand and penalties.

Supplying JCBs, excavators and similar equipment with operators and maintenance arrangements was held not to amount to taxable supply of tangible goods service where the contracts showed transfer of possession and effective control to the recipient. Ancillary features such as monthly hire billing, operator deployment, maintenance duties and repair clauses did not change the character of the arrangement. As the tax demand itself was unsustainable, the connected interest and penalties also could not survive, and limitation was not examined.

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Issues: Whether the activity of supplying JCBs, excavators and other equipment with operators and maintenance arrangements amounted to taxable service of supply of tangible goods, and whether the demand, interest and penalties could be sustained.

Analysis: The impugned contracts and work orders showed that the equipment was hired on monthly basis, but the decisive test was whether possession and effective control had been transferred to the recipients. The contractual terms and the nature of the arrangement indicated that the recipient had dominion over the equipment, while the presence of operators, maintenance obligations, repair clauses and billing on hire basis did not alter the character of the transaction. The Tribunal followed the settled principle that where the right to use goods with possession and effective control stands transferred, the transaction falls outside the levy of supply of tangible goods service. Since the tax demand itself was unsustainable, the connected interest and penalties could not survive. The Tribunal therefore found it unnecessary to examine limitation.

Conclusion: The transaction was not taxable as supply of tangible goods service and the demand of service tax, interest and penalties was liable to be set aside.

Ratio Decidendi: A transaction is outside the levy of supply of tangible goods service when possession and effective control of the goods are transferred to the recipient, and ancillary terms such as operator deployment, maintenance, or repair obligations do not by themselves establish taxable service.

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