2024 (6) TMI 1520 - AT - Service Tax

Deemed sale via Asset Licensing Agreement: transfer of exclusive right treated as VAT, no service tax liability

CESTAT held that the transaction under the Asset Licensing Agreement constituted a deemed sale by transfer of exclusive right to use goods to the ... Taxability under service tax - Nature of sctivity - deemed sale or not - transactions under the Asset Licensing Agreement - Appellant discharged VAT on the transaction and the VAT Authorities already concluded the assessment proceedings in respect of the same transaction, considering the transaction as the transfer of right to use goods - HELD THAT:- The exclusive possession with right to use the goods was given by the Appellant to M/s FKOL, who were free to use the goods. We further find from the Clause 2.7 of the agreement, which provides that even if the Appellant decides to sell or transfer its right, title or interest in the goods during the term or the extended term for right to use granted, the Appellant shall take prior consent from FKOL and further ensure that right to use of FKOL under the agreement are not disturbed/preserved and their interest is not prejudicially effected. Thus, evidently, the Appellant had granted exclusive right to use without disturbance or encumbrance to their clients – FKOL and accordingly, it is held that they have rightly paid the Sales Tax/VAT on transfer of right to use the goods, to their customers, which is a transaction of deemed sale. Accordingly, service tax is not attracted. The impugned order is set aside - appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the transactions under the Asset Licensing Agreement constituted 'supply of tangible goods for use' amounting to transfer of right to use goods (a deemed sale) and hence excluded from service tax liability under the service tax regime applicable after 01.07.2012. 2. Whether payment of Sales Tax/VAT on the same transactions conclusively excludes the levy of service tax, and whether assessment/conclusion by VAT authorities is determinative for service tax liability. 3. Whether the terms of the contract (including clause preserving the transferee's rights on future sale by the transferor and restrictions on removal/assignment) demonstrate absence of transfer of possession and effective control so as to attract service tax under the taxable service definition relating to supply of tangible goods. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of the transaction: transfer of right to use goods (deemed sale) vs. taxable service in relation to supply of tangible goods Legal framework: The taxable service definition in the service tax law in issue encompasses 'any service ... in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control'. The constitutional and statutory position treats transfer of right to use goods as a taxable event for sales tax/VAT as a 'deemed sale'. The Government's explanatory note clarifies that transactions which involve transfer of both possession and control are treatable as deemed sale and are not to be covered under the service tax levy on supply of tangible goods for use. Precedent treatment: The Tribunal relied on prior decisions that treat transfer of right to use, accompanied by payment of sales tax/VAT, as indicative of a deemed sale and not a taxable service. The judgment refers to established principles from higher court authority describing attributes necessary for a transaction to constitute transfer of right to use goods (goods available for delivery; consensus as to identity; legal right to use including permissions/licenses; exclusivity of right vis-à-vis transferor; and owner not being able to again transfer the same rights during the period). Interpretation and reasoning: The Tribunal examined contractual terms and factual matrix - exclusive licence to use, custody given to transferee, restrictions on removal, restrictions on assignment/sublicense by transferee, and clause requiring transferor to protect transferee's rights if transferor sells title during agreement term. The Tribunal found that the transferee had exclusive right to use the assets for the specified research purposes, that the transferor retained formal title but did not retain possession and effective control in any meaningful way that would permit the transferor to interfere with use, and that the transferee's rights could not be prejudiced by subsequent sale by the transferor without prior consent. Applying the statutory definition and the Government note, the Tribunal treated these features as satisfying the attributes of transfer of right to use goods (a deemed sale) and therefore outside the service tax net for supply of tangible goods for use. Ratio vs. Obiter: Ratio - Transactions granting exclusive right to use tangible goods per contractual terms, together with payment of sales tax/VAT, are not leviable to service tax as 'supply of tangible goods for use'. Obiter - Observations on the possible relevance of situs of contract and general note that whether possession and control are transferred is a question of fact to be decided on contract terms and other material facts. Conclusions: The Tribunal concluded that the transactions constituted transfer of right to use goods (deemed sale), and therefore service tax under the relevant taxable service provision was not attracted. Issue 2 - Effect of VAT/Sales Tax payment and VAT assessment on service tax liability Legal framework: The Government explanatory note provides that if a transaction is leviable to VAT/sales tax as deemed sale, it is not to be included within the scope of the service tax on supply of tangible goods for use; whether a transaction involves transfer of possession and control is a question of fact and may be inferable from VAT treatment. Precedent treatment: The Tribunal relied on earlier Tribunal precedent holding that where consideration was subjected to sales tax and records (invoices) so indicate, impugned service tax demands are unsustainable. The decision referenced the principle that VAT assessment may be a relevant indicium though not necessarily conclusive in every case. Interpretation and reasoning: The Tribunal considered the VAT payment and the VAT authority's assessment as corroborative evidence that the transaction was treated and taxed as a transfer of right to use goods. The Tribunal rejected the lower authority's view that payment of VAT is not conclusive, holding instead that, on the facts, the VAT payment together with contractual terms established the nature of the transaction. The Tribunal also examined disputed factual contentions regarding amounts and additional VAT paid and found the record supported that VAT was discharged on the transaction. Ratio vs. Obiter: Ratio - Where the contract terms and documentary evidence demonstrate that consideration was subjected to VAT/sales tax as transfer of right to use goods, such VAT treatment is a significant (and on the present facts decisive) factor excluding the transaction from service tax. Obiter - General statement that VAT treatment alone may not be conclusive in every factual matrix; the ultimate test remains contractual terms and factual possession/control analysis. Conclusions: The Tribunal held that payment and assessment of VAT in respect of the transactions, when read with contractual terms, established the transactions as deemed sale and excluded them from service tax liability. Issue 3 - Role of specific contractual clauses (e.g., preservation of transferee's rights on transfer by transferor; restrictions on removal/assignment) in determining possession and effective control Legal framework: Determination of transfer of possession and effective control is fact-sensitive and depends on contract terms and manner of exercise of rights; exclusivity, right to use to the exclusion of owner, and inability of owner to further transfer rights are relevant indicia. Precedent treatment: Higher court guidance enumerating essential attributes for transfer of right to use was applied to assess whether contractual terms satisfied those attributes. Tribunal precedent has distinguished licence-type permissions from exclusive transfer of right to use based on the scope of permitted use and restrictions on transfer/assignment. Interpretation and reasoning: The Tribunal analyzed clause 2.7 (obligation on transferor to obtain prior consent from transferee and preserve transferee's rights upon any transfer of title) as evidence that transferee's rights were exclusive and protected against interference by the transferor or its purchasers. Combined with restrictions on removal of assets and limitation of use to specified research purposes, the Tribunal concluded transferee had effective exclusive right to use, even though legal title remained with transferor, thereby satisfying features of transfer of right to use and excluding the transaction from being a taxable service. Ratio vs. Obiter: Ratio - Contractual provisions preserving exclusive use rights and preventing transferor from prejudicing transferee's rights are material indicators that possession and effective control were transferred for the purpose of determining service tax liability. Obiter - Distinctions drawn from other fact patterns (e.g., pure licence with limited access) support that different contractual arrangements may lead to different conclusions. Conclusions: The Tribunal concluded that the contractual clauses demonstrated the grant of exclusive right to use and protection of transferee's interests, reinforcing the finding of deemed sale and negating service tax liability. Overall Conclusion and Disposition The Tribunal set aside the impugned orders demanding service tax, interest and penalties, allowing the appeal and holding that the transactions constituted transfer of right to use goods (deemed sale) on the facts and contractual terms, with VAT having been paid accordingly, and therefore service tax was not attracted. Consequential relief was directed in accordance with law.