Transfer of right to use goods excludes diesel generator hire from service tax where possession and control pass to the customer.

Leasing and hiring of diesel generating sets was examined under the pre-01.07.2012 service tax regime and section 66E(f), but the Tribunal found that the arrangement involved transfer of possession and effective control to the customers. On that basis, the activity was held not to be Supply of Tangible Goods for Use and instead amounted to transfer of right to use goods, a deemed sale under Article 366(29A)(d). Because the transactions fell outside the service tax net, the confirmed tax demand, interest and penalties could not survive and were set aside.

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Issues: (i) Whether leasing and hiring of diesel generating sets amounted to Supply of Tangible Goods for Use so as to attract service tax under the pre-01.07.2012 regime and under section 66E(f) thereafter; (ii) whether the transfer was a transfer of right to use goods constituting a deemed sale and therefore outside the service tax net; and (iii) whether the demand of service tax with interest and penalties could be sustained.

Issue (i): Whether leasing and hiring of diesel generating sets amounted to Supply of Tangible Goods for Use so as to attract service tax under the pre-01.07.2012 regime and under section 66E(f) thereafter.

Analysis: The applicable levy required supply of tangible goods for use without transfer of possession and effective control. The contractual terms showed that the equipment was delivered, installed, commissioned, operated and eventually decommissioned for the customer's use, while the customer had the operational authority over the equipment during the hire period. The arrangement was examined as a whole and the Tribunal found that the essential control over use rested with the customer, not the supplier.

Conclusion: The activity did not fall within Supply of Tangible Goods for Use.

Issue (ii): Whether the transfer was a transfer of right to use goods constituting a deemed sale and therefore outside the service tax net.

Analysis: Under Article 366(29A)(d) of the Constitution of India, transfer of the right to use goods is deemed sale. The Tribunal applied the settled tests on transfer of right to use and held that the agreements and surrounding facts established transfer of possession and effective control to the customers. It also noted that VAT had been paid on the transactions and that the statutory and departmental materials indicated that transactions liable to VAT as deemed sale were excluded from service tax.

Conclusion: The transactions were deemed sales by way of transfer of right to use goods and were not taxable as service.

Issue (iii): Whether the demand of service tax with interest and penalties could be sustained.

Analysis: Since the underlying transactions were not taxable as Supply of Tangible Goods for Use or as declared services, the foundation for the confirmed demands failed. The Tribunal further held that the consequential interest and penalties could not survive once the demand itself was unsustainable.

Conclusion: The service tax demands, interest and penalties were set aside.

Final Conclusion: The appeals succeeded and the impugned orders confirming service tax on the lease and hire transactions were annulled.

Ratio Decidendi: A transaction for hire or lease of goods is outside the service tax net where the agreement and surrounding facts show transfer of possession and effective control amounting to transfer of right to use goods, because such a transaction is a deemed sale and not a taxable service.

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