2021 (8) TMI 1444 - AT - Service Tax

Transfer of right to use goods held deemed sale, VAT paid, service tax demand on licensing agreement quashed

The CESTAT allowed the appeal, holding that the transaction constituted a deemed sale involving transfer of the right to use goods, not a taxable service. ... Nature of activity - deemed sales or service - transfer of right to use goods or supply of tangible goods service - asset licensing agreement - 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, 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. Thus, service tax is not attracted - the impugned order is set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether consideration received under the asset licensing agreement constituted a 'transfer of right to use goods' amounting to a deemed sale liable to VAT, or a taxable service under 'supply of tangible goods' under Section 65(105)(zzzz) of the Finance Act, 1994. 1.2 Whether payment and assessment of VAT on the transaction, treating it as transfer of right to use goods, excluded the same transaction from levy of service tax under the category of 'supply of tangible goods'. 1.3 Whether, on proper interpretation of the agreement, exclusive possession and effective control over the goods were transferred to the customer so as to satisfy the attributes of 'transfer of right to use goods' as laid down in judicial precedents. 1.4 Consequentially, whether the demand of service tax, interest and penalties under Sections 77 and 78 was sustainable. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 3: Nature of the transaction - deemed sale (transfer of right to use goods) vs. taxable service of supply of tangible goods Legal framework (as discussed) 2.1 The Tribunal noted the statutory definition of taxable service under Section 65(105)(zzzz) of the Finance Act, 1994 for 'supply of tangible goods', which covers supply 'for use, without transferring right of possession and effective control'. 2.2 The Tribunal referred to the TRU clarification (D.O.F. No.334/1/2008-TRU dated 29.02.2008), which distinguishes: (i) transfer of right to use goods (deemed sale under Article 366(29A)(d) of the Constitution, liable to VAT), involving transfer of possession and control; and (ii) transactions allowing use of goods without transfer of possession and effective control, treated as taxable service. 2.3 Article 366(29A)(d) of the Constitution, post 46th Amendment, was noted as including tax on 'transfer of right to use any goods' within 'tax on sale or purchase of goods'. 2.4 The Tribunal applied the attributes for 'transfer of right to use goods' laid down in the judgment in Bharat Sanchar Nigam Ltd. v. Union of India, namely: existence of goods; consensus ad idem as to the goods; legal right to use; exclusive right to the transferee during the period; and inability of transferor to again transfer the same rights during that period. Interpretation and reasoning 2.5 The appellate authority below had held that although an exclusive licence to use the assets was granted, possession and effective control were not transferred, relying inter alia on: - restrictions on use only for specified research purposes; - prohibition on assigning/sub-licensing; - prohibition on removal of assets from the appellant's premises; and - a clause enabling the appellant to sell its right or interest in the assets during the term. 2.6 The Tribunal examined Clause 2.7 of the agreement, which mandated that if the appellant decided to sell its rights, title or interest in the imported assets during the term, it must obtain prior consent of the customer and ensure that the customer's rights under the agreement are preserved and not prejudicially affected. 2.7 From this clause and the factual matrix, the Tribunal inferred that: - exclusive possession with right to use the goods was granted to the customer; - the customer was free to use the goods for the agreed research purposes; - the appellant could not, during the term, disturb or encumber the customer's right to use, nor re-transfer the same rights to others; and - the customer's right to use continued even if the appellant transferred its title or interest, thereby protecting the exclusivity of the customer's use. 2.8 The Tribunal held that the mere existence of contractual limitations regarding manner or purpose of use, or absence of right to assign or sub-license, does not negate 'transfer of right to use goods', as transfer of such right may legitimately be accompanied by such restrictions while still amounting to deemed sale. 2.9 On this interpretation, the Tribunal found that the attributes (particularly exclusivity and non-transferability of the same rights to others during the term) laid down in Bharat Sanchar Nigam Ltd. were satisfied, and thus the transaction was properly characterized as 'transfer of right to use goods'. 2.10 Consequently, the Tribunal rejected the conclusion of the Commissioner (Appeals) that there was no transfer of possession and effective control, holding such conclusion as factually and legally unsustainable on the terms of the agreement. Conclusions 2.11 The Tribunal concluded that the transaction under the asset licensing agreement amounted to transfer of right to use goods, constituting a deemed sale within Article 366(29A)(d), and not a service of 'supply of tangible goods' under Section 65(105)(zzzz). 2.12 As the essence of the transaction was deemed sale, the correct tax was VAT/sales tax, not service tax. Issue 2: Effect of VAT payment and TRU clarification on service tax liability Legal framework (as discussed) 2.13 The TRU circular clarified that supply of tangible goods 'for use and leviable to VAT/sales tax as deemed sale of goods, is not covered under the scope' of the taxable service of supply of tangible goods, and that whether possession and control are transferred can be inferred, inter alia, from whether VAT is payable or paid. 2.14 The Tribunal also referred to its earlier decision in Rockwell Automation India (P) Ltd. v. CCE, Ghaziabad, where demand of service tax was set aside as the same consideration had already been subjected to sales tax, and no contrary evidence was produced by the department. Interpretation and reasoning 2.15 The appellant had paid VAT on the consideration received under the agreement, and the VAT authorities had concluded assessment treating the transaction as transfer of right to use goods. 2.16 The Commissioner (Appeals) had held that mere payment of VAT was not conclusive, and further opined on the situs of sale and alleged inadequacy of VAT payment based on a decision in 20th Century Finance Corporation Ltd. & Another v. State of Maharashtra. 2.17 The Tribunal noted that the agreement and actual conduct showed exclusive right to use had been transferred and VAT had been paid and assessed on that basis. The lower authority's reasoning that correct VAT should have been paid in another State or on a different base did not alter the character of the transaction as deemed sale. 2.18 Applying the TRU circular and following Rockwell Automation India (P) Ltd., the Tribunal accepted that once the transaction is subject to VAT as transfer of right to use goods, it falls outside the ambit of service tax on supply of tangible goods. 2.19 The Tribunal found the alleged discrepancy in VAT payment, as discussed by the lower authority, to be factually incorrect, noting the figures including normal VAT and additional VAT forming the total contractual amount. Conclusions 2.20 Payment and assessment of VAT on the transaction, coupled with the contractual and factual transfer of exclusive right to use, confirmed the transaction as deemed sale and removed it from the scope of service tax on 'supply of tangible goods'. 2.21 The service tax demand could not be sustained when the same consideration was already taxed as deemed sale under VAT and fulfilled the conditions for transfer of right to use goods. Issue 4: Sustainability of demand of service tax, interest and penalties Interpretation and reasoning 2.22 As the core finding was that the transaction constituted transfer of right to use goods (deemed sale) and not a taxable service, the foundational premise of the show cause notice and the orders below failed. 2.23 Once it was held that service tax under Section 65(105)(zzzz) was not attracted, there remained no basis for levy of service tax, interest, or imposition of penalties under Sections 77 and 78. Conclusions 2.24 The Tribunal set aside the demand of service tax in toto, along with interest and penalties imposed under Sections 77 and 78. 2.25 The appeal was allowed with consequential benefits in accordance with law.