Motor vehicle operational lease services under Master Lease Agreements ruled as deemed sale, not taxable service

CESTAT Mumbai held that motor vehicle operational lease services under Master Lease Agreements do not attract service tax liability. The tribunal ruled that such activities constitute deemed sale under Article 366(29A)(d) of the Constitution, citing BSNL v. Union of India SC precedent. The court distinguished between pre-negative list regime (prior to 01.07.2012) and post-negative list regime service tax provisions. Service tax demands and penalties under Sections 76, 77, and 78 of Finance Act 1994 were set aside as legally unsustainable. Appeal allowed.

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Issues Involved:

1. Taxability of operating lease transactions under "Rent-a-Cab Scheme Operator" service.
2. Applicability of extended period of limitation for demand of service tax.
3. Imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994.

Summary:

1. Taxability of Operating Lease Transactions:
The primary issue was whether the activities of the appellants in providing motor vehicles under an operating lease basis through a Master Lease Agreement (MLA) could be considered taxable services under the definition of "Rent-a-Cab Scheme Operator" service as defined by Section 65(91) of the Finance Act, 1994, and taxable service under Section 65(105)(o) for the pre-negative list period and under Section 65(B)51 for the post-negative list regime, or if these transactions were "deemed sales" as per Article 366(29A)(d) of the Constitution of India, subject to VAT/Sales Tax.

The Tribunal examined the MLA and found that the transactions satisfied the five-point criteria laid down by the Supreme Court in the Bharat Sanchar Nigam Limited case, indicating that the transactions were indeed "deemed sales." The Tribunal referred to similar cases, such as Arval India Pvt. Ltd. and Orix Auto Infrastructure Services Ltd., where operating lease agreements were held to be "deemed sales." Consequently, the Tribunal concluded that the appellants' transactions were not taxable under the "Rent-a-Cab Scheme Operator" service but were subject to VAT/Sales Tax as "deemed sales."

2. Applicability of Extended Period of Limitation:
The department had invoked the extended period of limitation for demanding service tax on the grounds of suppression of facts. However, since the Tribunal concluded that the transactions were "deemed sales" and not taxable services, the issue of invoking the extended period of limitation became irrelevant and unsustainable.

3. Imposition of Penalties:
Given that the Tribunal held the transactions to be outside the scope of service tax and categorized them as "deemed sales," the imposition of penalties under Sections 76, 77, and 78 of the Finance Act, 1994, was deemed inappropriate and was set aside.

Conclusion:
The Tribunal set aside the adjudged demands and penalties confirmed in the impugned order dated 04.11.2015, allowing the appeals in favor of the appellants. The activities under the MLA were recognized as "deemed sales" and not subject to service tax.

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