CESTAT allows appeal on diesel generator lease service tax demand under Supply of Tangible Goods service

CESTAT Ahmedabad allowed the appeal regarding non-payment of service tax on diesel generator set leases. The department demanded service tax under Supply of Tangible Goods service, arguing the appellant retained possession and control. However, the tribunal found that lease agreements clearly transferred possession and effective control to lessees, who bore maintenance and operating costs. Since VAT was already paid on the lease agreements, service tax was not liable under Supply of Tangible Goods service. The tribunal relied on precedent and set aside the original demand order.

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Issues Involved:
1. Whether the appellant transferred the right of possession and effective control of Diesel Generator Sets to the lessees.
2. Whether the appellant is liable to pay service tax under the category of "Supply of Tangible Goods service."
3. Whether the payment of VAT on the transactions exempts the appellant from service tax liability.
4. Whether the penalties and interest imposed under Section 78 of the Finance Act, 1994, are justified.

Issue-wise Detailed Analysis:

1. Transfer of Right of Possession and Effective Control:

The appellant contended that they had transferred the right of possession and effective control of Diesel Generator Sets to the lessees, who were responsible for maintaining and operating the sets. The lessees bore all maintenance and operating costs during the lease period. The appellant relied on various decisions and guidelines provided by the Hon'ble Apex Court in the case of BSNL & Ors vs. UoI & Ors, which outlined the criteria for determining the transfer of goods/deemed sale. The guidelines emphasized that the transferee should have a legal right to use the goods, and for the period of the lease, this right should be exclusive to the transferee.

2. Liability to Pay Service Tax under "Supply of Tangible Goods Service":

The department argued that the appellant did not transfer the right of possession and effective control over the Diesel Generator Sets, thus making them liable to pay service tax under the category of "Supply of Tangible Goods service." However, the appellant countered this by stating that they had paid VAT on the transactions, which indicated a deemed sale and not a service. The agreements between the appellant and the lessees explicitly stated that the lessees had the right of possession and effective control over the Diesel Generator Sets.

3. Payment of VAT and Exemption from Service Tax Liability:

The appellant argued that since they had paid VAT on the transactions, they were not liable to pay service tax. They relied on CBEC Circular No. 334/1/2008-TRU dated 29.02.2008, which clarified that service tax is not liable if VAT has been paid on the transactions. The Tribunal, in various decisions, had held that if VAT is paid on leasing tangible goods, the liability to pay service tax does not arise. The appellant cited decisions in the cases of Technical Dying Services Pvt. Limited vs. CCE&ST and Jeevanjyot Motors vs. CCE&ST, which supported their contention.

4. Penalties and Interest under Section 78 of the Finance Act, 1994:

The impugned orders confirmed the service tax demand and imposed equal penalties under Section 78 of the Finance Act, 1994, along with interest. However, the Tribunal found that the appellant had paid VAT on all lease agreements and that the lessees had the right of possession and effective control over the Diesel Generator Sets. The Tribunal referred to previous decisions where it was held that payment of VAT exempts the transaction from service tax liability. Consequently, the Tribunal set aside the impugned orders, including the penalties and interest.

Conclusion:

The Tribunal concluded that the appellant had transferred the right of possession and effective control of the Diesel Generator Sets to the lessees, and since VAT was paid on the transactions, service tax was not liable under the "Supply of Tangible Goods service." The impugned orders were set aside, and the appeals were allowed with consequential relief in accordance with the law. The Tribunal's decision was pronounced in the open court on 30.09.2024.

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