2024 (2) TMI 516 - AT - Service Tax

Laboratory infrastructure license for exclusive use constitutes deemed sale under VAT, not taxable service under service tax

M/s Dabur Research Foundation Versus Commissioner of Customs, Central Excise & Service Tax, Ghaziabad

M/s Dabur Research Foundation Versus Commissioner of Customs, Central Excise & Service Tax, Ghaziabad - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether consideration received for granting a right to use tangible goods (machinery/equipment/appliances) under an asset-licensing agreement attracts service tax as 'supply of tangible goods for use' or constitutes a 'deemed sale' taxable under VAT/sales tax, thereby excluding service tax. 2. Whether payment of VAT/sales tax and completing VAT assessment on the transaction is conclusive of exclusion from service tax in respect of the same transaction. 3. Whether contractual terms (possession, effective control, exclusivity, restriction on alienation, and physical custody) determine the nature of the transaction (transfer of right to use vs service) and the situs/taxable event for such transactions. 4. Whether factual findings about possession and control made on the contract terms and conduct of parties justify treating the transaction as transfer of right to use (deemed sale) and negate invocation of service tax. ISSUE-WISE DETAILED ANALYSIS Issue 1: Characterisation of the transaction - service tax ('supply of tangible goods for use') v. deemed sale under VAT Legal framework: The definition of taxable service in the Finance Act covers services 'in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control'. The Constitution (post-amendment) treats transfer of the right to use goods for consideration as a tax on sale/purchase (deemed sale) liable to state VAT/sales tax. Administrative guidance distinguishes transfer of right to use that involves transfer of possession and control (deemed sale) from supply of goods for use where legal possession and effective control remain with the supplier (service). Precedent treatment: The Court relied on earlier authoritative exposition (applied by the Tribunal/Court below) that enumerates attributes required to constitute transfer of right to use goods: availability of goods for delivery, consensus ad idem on identity, transferee's legal right to use, exclusion of transferor during the period, and inability of owner to transfer same rights again. A prior Tribunal decision dealing with similar invoices and VAT payment was cited favourably in submissions; another decision on infrastructure licences was distinguished on facts by the Appellant and by the lower authority. Interpretation and reasoning: The Tribunal examined the written terms of the asset-licensing agreement and factual matrix. Key contract features were found to grant exclusive right to use to the transferee for a defined research purpose, restrict the transferee from sub-licensing/assigning the right, prohibit removal of assets from supplier's premises, and require supplier to obtain transferee's consent before selling assets so as to protect the transferee's right during the term. The Tribunal treated these terms as evidencing an exclusive right to use for the term, with the supplier retaining title but not the concomitant effective control. The Tribunal interpreted the statutory and administrative tests to mean that where exclusive use is conferred and the transferee has the legal right to use to the exclusion of the owner for the period, the transaction is a transfer of right to use (deemed sale) and not a service even if title is retained. Ratio vs. Obiter: Ratio - A transaction conferring exclusive right to use tangible goods, evidenced by contract terms that deprive the owner of effective control for the period and restrict alienation without transferee's consent, constitutes transfer of right to use (deemed sale) and falls under VAT/sales tax, excluding service tax. Obiter - General remarks on types of machinery usually treated as supply for use (from prior administrative guidance) are ancillary. Conclusions: The Tribunal concluded that the agreement conferred exclusive right to use the assets for the specified purpose, satisfying the statutory attributes of transfer of right to use; hence service tax does not apply and the transaction is correctly treated as a deemed sale subject to VAT. Issue 2: Effect of VAT payment/assessment on exclusion from service tax Legal framework: Administrative guidance states that supply of tangible goods for use which is leviable to VAT as deemed sale is not intended to be covered under the service tax entry; whether a transaction involves transfer of possession and control is a question of fact ascertainable inter alia from whether VAT is payable or paid. Precedent treatment: The Tribunal considered prior adjudications where the fact that consideration was subjected to sales tax was held to be significant in negating service tax demands when no contrary material established otherwise. A decision relied on by the departmental side addressing differing facts was distinguished. Interpretation and reasoning: The Tribunal held that payment of VAT and completion of VAT assessment on the transaction is a strong indicator, and in the present case corroborated by contract terms, that the transaction was a deemed sale. The Tribunal rejected the lower authority's view that payment of VAT is not conclusive for exclusion from service tax, finding that where the contractual matrix and VAT treatment consistently point to transfer of right to use, VAT payment supports exclusion from service tax. Ratio vs. Obiter: Ratio - Where VAT/sales tax has been legitimately levied on a transaction treated in law and on facts as transfer of right to use, such treatment is a material and determinative factor negating service tax liability on the same consideration. Obiter - Cautionary note that VAT payment alone may not be decisive in a contrary factual matrix. Conclusions: The Tribunal accepted that VAT payment on the transaction, aligned with contractual rights conferred, justifies treating the transaction as deemed sale and excludes it from service tax coverage. Issue 3: Role of contractual terms - possession, control, exclusivity, alienation restrictions, and situs of taxable event Legal framework: Determination of whether a transaction is transfer of right to use depends on facts - primarily contractual terms about possession, control, scope of use and restrictions. Situs/taxable event for transfer of right to use is linked to where the contract is executed and attributable to the point of transfer of that right. Precedent treatment: Administrative circulars and judicial pronouncements emphasize analysis of contract terms and attendant facts to decide possession and control questions. Authorities distinguishing licence-like permissions (mere access) from exclusive rights to use were considered by the Tribunal in assessing competing decisions. Interpretation and reasoning: The Tribunal analyzed specific clauses: exclusive licence to use the laboratory infrastructure, prohibition on removal of assets, and clause requiring supplier's prior consent before sale so as to preserve transferee's rights. These were interpreted to show that the transferee was given exclusive use and the supplier did not retain effective control during the term. The Tribunal further observed that where goods are available and a written contract executed, the point of situs/taxable event for transfer of right to use is the place of contract/transfer. Ratio vs. Obiter: Ratio - Contractual provisions that confer exclusive use and restrict supplier's ability to transfer rights during the term are decisive factual indicators of transfer of right to use; situs of such transaction follows the point at which rights are transferred by contract. Obiter - Observations on typical industry examples in administrative guidance are illustrative only. Conclusions: The contractual terms were decisive in characterising the transaction as transfer of right to use; accordingly, the taxable event and situs considerations align with VAT treatment and preclude service tax levy. Issue 4: Sufficiency of factual findings to negate service tax and set aside the impugned demand Legal framework: Adjudicatory findings on facts - possession, control, exclusivity and payment treatment - govern tax characterisation; appellate tribunal reviews whether lower authority's conclusions are supported by contract and records. Precedent treatment: Where lower authorities fail to demonstrate contrary evidence to VAT treatment or ignore contract terms indicating exclusive use, appellate tribunals have set aside service tax demands. Interpretation and reasoning: The Tribunal found that the Commissioner (Appeals) and record-based analysis established that custody/possession was effectively given for use, exclusive rights were granted (subject to specified purpose and restrictions), and VAT had been paid on the deemed sale. The Tribunal held that the lower authority's reliance on distinctions drawn in other cases was factually misplaced and that the impugned order's recalculated service tax demand could not stand in light of the contract and VAT treatment. Ratio vs. Obiter: Ratio - Where factual findings on the contract terms and contemporaneous tax treatment demonstrate a transfer of right to use, demands for service tax on the same consideration are unsustainable. Obiter - Remarks on procedural recalculation and penalties are ancillary. Conclusions: The Tribunal set aside the impugned service tax demand and related penalties, holding the transaction to be a deemed sale subject to VAT in view of exclusive right to use and corroborative VAT payment, and allowed relief accordingly with consequential benefits as per law.