Transfer of the right to use goods: exclusive control over machinery made the transaction a deemed sale, not a taxable service.

Leasing of machinery under the agreements amounted to a transfer of the right to use goods because the lessee had exclusive possession, effective control, and operational control over the machinery during the contract period. That made the transaction a deemed sale under Article 366(29A)(d) of the Constitution, and it could not be subjected again to service tax as supply of tangible goods for use under Section 65(105)(zzzzj) of the Finance Act, 1994. The service tax demand was therefore unsustainable, and the appeals succeeded with the impugned orders set aside in favour of the assessee.

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Issues: Whether leasing of machinery on the terms of the agreements amounted to a transfer of the right to use goods as a deemed sale, or whether it constituted a taxable service of supply of tangible goods for use under the service tax law.

Analysis: The decisive test was whether possession and effective control over the machinery remained with the lessor or stood transferred to the lessee. The agreements, read as a whole, showed dedicated and exclusive deployment of the machinery by the lessee for the contract period, with the lessee controlling use, deployment and operational aspects. Once the transaction was found to be a transfer of the right to use goods, it fell within the constitutional concept of deemed sale under Article 366(29A)(d) of the Constitution of India. A transaction treated as sale for VAT purposes could not again be subjected to service tax as supply of tangible goods for use under Section 65(105)(zzzzj) of the Finance Act, 1994.

Conclusion: The activity was held to be a deemed sale and not a taxable service of supply of tangible goods for use; the service tax demand was unsustainable.

Final Conclusion: The appeals succeeded and the impugned orders were set aside, with the dispute resolved in favour of the assessee.

Ratio Decidendi: Where a contract transfers exclusive possession and effective control of goods to the user, the transaction is a deemed sale by transfer of the right to use goods and cannot be taxed again as supply of tangible goods for use.

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