2024 (2) TMI 671 - AT - Service Tax

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 ... Levy of service tax - Supply of Tangible Goods Service - appellant had entered into a lease agreement with the foreign company namely M/s. Cessna Financial Corporation, Kansas, USA on 11.12.2007 to acquire CESSNA make air craft on lease, based on the conditions agreed between them - period May 2008 to January 2013 - extended period of limitation - HELD THAT:- From the agreement, it is seen that it is a dry lease agreement and the crew is not supplied along with the air craft. The aircraft is delivered to appellant and is in the lawful possession of appellant. The entire staff / crew of the air craft is employed by the appellant and the air craft is also operated as per the registrations and licenses applied and issued to the appellant. It cannot be then said that the possession and effective control is not transferred to the appellant. Thus for the period prior to 01.07.2012, the transaction does not fall within the definition of ‘Supply of Tangible Goods’. After 01.07.2012, changes have been effected in the service tax law and all services falling under ‘declared service’ (66B) is subject to levy of service tax. Section 66E of the Finance Act, 1994 deals with the concept of declared services. Clause (f) to Section 66E states that ‘transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer or right to use such goods’ is a declared service. It means a lease agreement which does not have the character of transfer of right to use goods is taxable service - In the present case, the possession of the aircraft is transferred to the appellant who has taken delivery of the same. So also, the air craft is operated by the crew employed by the appellant. Appellant has to undertake maintenance and repair of the air craft and has to take insurance for the risk of loss etc. These would go to show that the effective control over such goods is also transferred to the appellant. The demand cannot sustain and requires to be set aside - Appeal allowed. 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.