Transfer of right to use goods, not supply of tangible goods, applies where possession and effective control pass to the customer.

Lease of machineries and transformers was examined to determine whether it was taxable as supply of tangible goods under the Finance Act, 1994, or a transfer of the right to use goods outside service tax. The decisive test was whether possession and effective control remained with the supplier; on the stated facts, the customer had possession and free use during the lease period, while the supplier retained no effective control. The transaction was also treated as a sale for VAT purposes. Applying that principle, the arrangement was held to be a transfer of the right to use goods, not a taxable service, and the service tax demand and penalty were not sustainable.

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Issues: Whether the lease of machineries and transformers, for which rent was collected and VAT was paid, constituted the taxable service of supply of tangible goods under Section 65(105)(zzzzj) of the Finance Act, 1994, or whether it amounted to a transfer of the right to use goods amounting to deemed sale and falling outside the service tax levy.

Analysis: The decisive question was whether the goods were supplied without transfer of possession and effective control. On the facts recorded, the transformers and machineries were in the customer's possession during the lease period, the customer could use them as per its convenience, and the appellant had no effective control during that period. The transaction was also treated as a sale for VAT purposes. Applying the settled principle that a taxable supply of tangible goods requires use without transfer of possession and effective control, the transaction was found to be a transfer of the right to use goods and not a taxable service.

Conclusion: The activity did not fall within the taxable service of supply of tangible goods, and the service tax demand and penalty were not sustainable.

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