Transfer of railway rakes to railways constitutes deemed sale under Article 366(29A), not taxable service

CESTAT NEW DELHI held that transfer of railway rakes to railways constituted deemed sale under Article 366(29A) of the Constitution, not a taxable service. The rakes were clearly identifiable and railways obtained exclusive right to use them, with effective control and possession transferred to railways. The appellant was precluded from giving same rakes to others during contract period. Following precedent in MSPL case, the transaction qualified as deemed sale regardless of whether VAT was paid, as nature of transaction doesn't change based on tax payment. Revenue's appeal was dismissed.

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Issues Involved:
1. Whether the supply of wagons under the Wagon Investment Scheme to Indian Railways constitutes a service liable to service tax.
2. Whether the transaction qualifies as a "deemed sale" under Article 366 (29A) of the Constitution, thus exempting it from service tax.

Issue-wise Summary:

Issue 1: Service Tax on Supply of Wagons
- The Principal Commissioner CGST and Central Excise Raipur appealed against the dropping of demand for service tax, interest, and penalties against M/s. Bagariya Brothers Pvt Ltd.
- The respondents provided wagons under the Wagon Investment Scheme to Indian Railways, which the Revenue viewed as a taxable service u/s 65B(44) of the Finance Act, 1994.
- The original adjudicating authority confirmed the demand and imposed penalties, but the Commissioner (Appeals) set aside the order, leading to the Revenue's appeal.
- The learned DR argued that the 10% freight rebate received by the respondent constitutes consideration for the provision of service, falling under the category of 'service being other than service specified in the negative list of services' in terms of section 66B of the Finance Act.
- The DR pointed out that the respondents had not discharged VAT/Sales tax on the wagons, implying that the title of wagons remained with the respondent.
- The DR contended that the Commissioner (Appeals) wrongly set aside the demand, arguing that the supply of guaranteed rakes and freight rebate is a return on investment, not a service.

Issue 2: Deemed Sale under Article 366 (29A)
- The tribunal examined whether the transaction constitutes a "deemed sale" under Article 366 (29A) of the Constitution, which would exempt it from service tax.
- The tribunal referred to the Hon'ble Apex Court's decision in BSNL, which laid down criteria for a transaction to constitute a deemed sale as a transfer of the right to use.
- The tribunal noted that all criteria laid down by the Apex Court were satisfied: goods were available for delivery, there was a consensus ad idem, the transferee had a legal right to use the goods, and the transferor could not transfer the same rights to others during the contract period.
- The tribunal found that the rakes supplied to Indian Railways were identifiable and used exclusively by the railways, satisfying the conditions for deemed sale.
- The tribunal cited previous decisions, including those in the appellant's own case and other similar cases, where it was held that such transactions constituted deemed sales.
- The tribunal concluded that the effective control and possession of the wagons were transferred to Indian Railways, qualifying the transaction as a deemed sale under Article 366 (29A), thus not liable to service tax.
- The tribunal dismissed the Revenue's argument that non-payment of VAT by the respondents changed the nature of the transaction, stating that the nature of the transaction is independent of tax payment compliance.

Conclusion:
- The appeal filed by the Revenue was dismissed.
- The tribunal upheld the decision that the transaction qualified as a deemed sale and was not liable to service tax.

(Order pronounced in the open Court on 07.06.2024)

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