Aircraft lease with operational control transfer not taxable under service tax provisions

CESTAT Chennai allowed the appeal regarding service tax levy on aircraft lease. Appellant leased aircraft from US company under dry lease agreement from May 2008 to January 2013. For pre-July 2012 period, transaction did not fall under Supply of Tangible Goods Service as appellant had lawful possession, employed crew, operated aircraft, and maintained effective control. Post-July 2012, despite declared service provisions, effective control transfer to appellant meant lease did not constitute taxable service. Demand set aside as possession, operational control, maintenance responsibility, and insurance obligations demonstrated transfer of right to use goods.

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Issues Involved:
1. Whether the appellant is liable to pay service tax under "Supply of Tangible Goods Service" for the period May 2008 to January 2013.
2. Whether the show cause notice and impugned order are deficient and fail to invoke the correct provisions of law.
3. Whether the lease agreement constitutes a transfer of right to use goods, thereby excluding it from service tax levy.
4. Whether the demand of service tax can be sustained based on the facts and legal interpretations provided.

Summary:

1. Liability to Pay Service Tax:
The primary issue is whether the appellant is liable to pay service tax under "Supply of Tangible Goods Service" for the period May 2008 to January 2013. The adjudicating authority held that there was no transfer of possession and effective control of the aircraft to the appellant, thus falling within the definition of "Supply of Tangible Goods Service" as per Section 65 (105) (zzzzj) prior to 01.07.2012. However, the Tribunal found that the agreement was a dry lease, with the aircraft delivered to and operated by the appellant, indicating transfer of possession and effective control. Therefore, the transaction does not fall within the definition of 'Supply of Tangible Goods' for the period prior to 01.07.2012. Post 01.07.2012, the transaction is also outside the ambit of service tax as it constitutes a transfer of right to use goods, deemed as a sale under Article 366 (29A) of the Constitution.

2. Deficiency in Show Cause Notice and Impugned Order:
The appellant argued that the show cause notice and impugned order are deficient as they do not invoke the correct provisions of law post 01.07.2012, specifically Section 65B (44) and Section 66E (f) of the Finance Act, 1994. The Tribunal noted that the show cause notice failed to consider these provisions, thus making the demand unsustainable.

3. Transfer of Right to Use Goods:
The appellant contended that the lease agreement constituted a transfer of right to use goods, which is excluded from service tax levy. The Tribunal examined the agreement and found that the appellant had lawful possession and effective control over the aircraft, including responsibilities for maintenance, insurance, and operation. This satisfied the criteria laid down by the Supreme Court in Bharat Sanchar Nigam Ltd. Vs Union of India, indicating a transfer of right to use goods, thereby excluding it from service tax.

4. Legal Interpretations and Precedents:
The Tribunal referred to previous decisions, including Blue Dart Aviation Ltd. Vs CST Chennai and Heligo Charters Pvt. Ltd. VS CST Mumbai, which supported the view that leasing agreements involving transfer of right to use goods are deemed sales and not subject to service tax. The Tribunal concluded that the demand of service tax cannot be sustained based on these legal interpretations and precedents.

Conclusion:
The Tribunal set aside the demand for service tax, interest, and penalties, allowing the appeal with consequential relief. The transaction was deemed a transfer of right to use goods, excluded from service tax under the relevant legal provisions and precedents.

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