Business providing customized gas production units and cryogenic storage tanks on rental/lease constitutes deemed sale, not supply of tangible goods service

The CESTAT Ahmedabad held that a business providing customized gas production units and cryogenic storage tanks on rental/lease basis constitutes deemed sale rather than supply of tangible goods service. The tribunal found that although machinery was supplied for customer use, the right of possession and effective control was transferred to the customer. Under constitutional provisions and established precedent, when transfer of right to use involves both possession and control, it qualifies as deemed sale subject to VAT/sales tax, not service tax under supply of tangible goods service category. The demand was set aside and appeal allowed.

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Issues Involved
1. Classification of the appellant's activity under "supply of tangible goods services" as per Section 65(105)(ZZZZJ) of the Finance Act, 1994.
2. Applicability of VAT versus Service Tax on the transactions.
3. Transfer of right to possession and effective control of the goods.
4. Precedent cases and circulars supporting the appellant's position.

Detailed Analysis

1. Classification under "Supply of Tangible Goods Services":
The primary issue was whether the appellant's activity of leasing FLOXAL Units, storage tanks, and other equipment falls under the "supply of tangible goods services" as defined in Section 65(105)(ZZZZJ) of the Finance Act, 1994. According to this definition, the service qualifies if the supply of tangible goods is without transferring the right of possession and effective control of such goods. The appellant argued that once the equipment was installed at the customer's premises, the right to possession and effective control was transferred to the customer. Therefore, the transaction should not be classified under "supply of tangible goods services."

2. Applicability of VAT versus Service Tax:
The appellant had been paying VAT on the lease transactions since 1996, under the belief that the activity constituted a sale as per Section 2(23) of the Gujarat Value Added Tax Act, 2003, and Section 2(g)(iv) of the Central Sales Tax Act, 1946. The appellant contended that since VAT was already being paid, the transaction should not be subject to service tax. The tribunal noted that the transaction was a deemed sale under Article 366(29A) of the Constitution of India, which includes the transfer of the right to use any goods for any purpose for cash, deferred payment, or other valuable consideration.

3. Transfer of Right to Possession and Effective Control:
The tribunal examined whether the appellant had transferred the right to possession and effective control of the equipment to the customers. It was found that the customers had full liberty to possess and use the equipment for their production activities. The appellant was responsible for the operation of the FLOXAL Unit, but the customers bore the responsibility for any injury or damage to third parties. This indicated that the right to possession and effective control was indeed transferred to the customers, thereby excluding the transaction from the scope of "supply of tangible goods services."

4. Precedent Cases and Circulars:
The appellant cited various circulars and judgments to support their case. Circular No. 334/1/2008-TRU dated 29.02.2008 clarified that the supply of tangible goods involving the transfer of possession and control is subject to VAT and not service tax. The tribunal referred to several cases, including Quippo Energy Pvt. Ltd Vs CST and Air Liquide North India Pvt. Ltd Vs CCE, which supported the appellant's position that the transfer of the right to use goods constitutes a sale and is not subject to service tax. The tribunal also noted that the appellant had been consistently paying VAT on these transactions, reinforcing the argument that the transactions were deemed sales.

Conclusion:
The tribunal concluded that the appellant's activity of leasing equipment did not fall under the "supply of tangible goods services" as the right to possession and effective control was transferred to the customers. Consequently, the demand for service tax was not sustainable. The tribunal set aside the impugned orders and allowed the appeals, providing relief to the appellant.

Pronouncement:
The judgment was pronounced in the open court on 13.09.2023, setting aside the demand under "supply of tangible goods services" and allowing the appeals with consequential relief.

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