2025 (1) TMI 1150 - AT - Service Tax

Trailer supply to clients constitutes hire services not tangible goods supply, falls under deemed sale concept outside service tax scope

CESTAT New Delhi held that appellant's supply of trailers to clients constituted hire/rent services rather than 'Supply of Tangible Goods' service. The ... Classification of services - Supply of Tangible Goods services - supply of trailers owned - appellant had not paid service tax due to the reason that their clients had paid the service tax in respect of their further supply/ activity - discharge of burden to prove. Whether M/s Sudhir Road Lines are liable to pay Service Tax under ‘Supply of Tangible Goods’ Service for supplying their trailers to others for being used for Transportation of Goods and when Service Tax stands already paid by the transfree? - HELD THAT:- The effective control and possession with respect to trailers given by the appellant was not with the appellant. The appellant was getting paid a fixed price per trailer from the respective client. Resultantly, the impunged activity was that of giving trailers on ‘Hire’ instead of it being wrongly classified as ‘Supply of Tangible Goods’. The service tax demand was proposed and has been confirmed based on the allegation that the trucks/trailers were not supplied to GTA. From the above discussion, it is clear that for activity of transfer of vehicles, the nature of transferee is not relevant neither for the activity to fall under ‘Supply of Tangible Goods Service’ not for the activity to be called as ‘Hire’. The relevant criteria for the distinction is whether the right to use is transferred with possession and effective control. In case it is so transferred, the activity will that be of hire else only it shall fall under service of ‘Supply of Tangible Goods’ - the moment the right to use goods is transferred, the activity gets covered under the concept of ‘deemed sale’ and gets out of the scope of service tax net. In BUILDERS ASSOCIATION OF INDIA AND OTHERS VERSUS UNION OF INDIA AND OTHERS (AND CONNECTED WRIT PETITIONS AND APPEALS) [1989 (3) TMI 356 - SUPREME COURT], the validity of the Constitution (Forty-sixth Amendment) Act was upheld. But the Apex Court ruled that the States’ power to levy tax on the goods involved in a works contract is subject to the restrictions in Article 286. As per the definition of Goods Transport Agency in Finance Act, 1994, the issuance of consignment note is mandatory criteria for holding any act of transportation to be an act of GTA. Resultantly, the findings arrived at by the adjudicating authorities below are erroneous on the face of the facts itself. The initial burden to prove the allegations was of the department which has not been discharged. The issue of exemption under Entry No. 22(b) of the Notification No. 25/2012 has wrongly been raised that entry as well as the sub-clause of Section 66D (Negative List of the Finance Act) exempts the transportation of goods by road except it is done by a courier agency or a goods transport agency. The appellant admittedly is not a goods transport agency. His clients have been the GTAs who admittedly have discharged the service tax liability. Resultantly and in view of the above discussion about Article 366 (29A), the activity rendered by the appellant is held to be of transfer by way of hire/rent of his trucks to the others. Since same is out of scope of the service tax net, hence, the finding arrived at by the authorities below are incorrect. Conclusion - i) The effective control and possession of the trailers were with the transferees, not the appellant. ii) The activity rendered by the appellant is held to be of transfer by way of hire/rent of his trucks to the others. iii) The registration of the appellant under the head Supply of Tangible Goods for use service was insufficient to prove the taxable nature of the activity. iv) The department failed to discharge its burden of proof regarding the retention of control by the appellant. v) The impunged activity was that of giving trailers on ‘Hire’ instead of it being wrongly classified as ‘Supply of Tangible Goods’. Appeal allowed. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:(i) Whether M/s Sudhir Road Lines is liable to pay Service Tax under the category of 'Supply of Tangible Goods' Service for supplying their trailers to others for transportation of goods, especially when the transferee has already paid the Service Tax.(ii) Whether the extended period for issuing a demand is applicable in this case.(iii) Whether a penalty under Section 78 is imposable upon the appellant.ISSUE-WISE DETAILED ANALYSISIssue (i): Liability to Pay Service Tax under 'Supply of Tangible Goods'Relevant Legal Framework and Precedents: The definition of 'Supply of Tangible Goods Service' under section 65 (105) (zzzzj) of the Finance Act 1994 requires that the service be related to the supply of tangible goods without transferring the right of possession and effective control. The Supreme Court in Bharat Sanchar Nigam Limited vs. Union of India provided guidance on the attributes necessary for a transaction to qualify as a transfer of the right to use goods.Court's Interpretation and Reasoning: The Tribunal observed that for a service to be classified under 'Supply of Tangible Goods', there must be no transfer of possession or effective control. The Tribunal noted that the appellant's clients had the legal right to use the trailers exclusively during the agreement period, indicating a transfer of possession and control.Key Evidence and Findings: The Tribunal found that the appellant's clients, who were Goods Transport Agencies (GTAs), had paid the Service Tax for the transportation of goods by road. It was also noted that the appellant did not retain control over the trailers once they were provided to the clients.Application of Law to Facts: The Tribunal concluded that the appellant's activity constituted giving trailers on hire rather than supplying tangible goods, as the right to use and control was transferred to the clients.Treatment of Competing Arguments: The department argued that the appellant was registered under 'Supply of Tangible Goods for use service' and did not qualify for exemption. However, the Tribunal found that registration alone does not determine the nature of the service provided.Conclusions: The Tribunal held that the appellant was not liable to pay Service Tax under the 'Supply of Tangible Goods' category as the activity was essentially hiring out trailers.Issue (ii): Applicability of Extended Period for Issuing DemandRelevant Legal Framework and Precedents: The extended period for issuing a demand is typically invoked in cases of willful misstatement or suppression of facts.Court's Interpretation and Reasoning: The Tribunal did not find evidence of willful misstatement or suppression by the appellant. The appellant acted under a bona fide belief that their activity was exempt from Service Tax.Conclusions: The Tribunal held that the extended period for issuing a demand was not applicable.Issue (iii): Imposition of Penalty under Section 78Relevant Legal Framework and Precedents: Section 78 of the Finance Act imposes penalties for non-payment of Service Tax due to fraud, collusion, or willful misstatement.Court's Interpretation and Reasoning: Given the Tribunal's finding of a bona fide belief by the appellant regarding the tax exemption, the imposition of a penalty was deemed unjustified.Conclusions: The Tribunal concluded that no penalty under Section 78 was warranted.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal observed, 'The effective control and possession with respect to trailers given by the appellant was not with the appellant. The appellant was getting paid a fixed price per trailer from the respective client. Resultantly, we hold that the impugned activity was that of giving trailers on 'Hire' instead of it being wrongly classified as 'Supply of Tangible Goods'.'Core Principles Established: The judgment clarified that the mere registration under a specific service category does not conclusively determine the nature of the service provided. The transfer of possession and control is critical in distinguishing between 'Supply of Tangible Goods' and a hiring arrangement.Final Determinations on Each Issue: The Tribunal set aside the order under challenge, concluding that the appellant was not liable for Service Tax under the 'Supply of Tangible Goods' category, the extended period for issuing a demand was not applicable, and no penalty under Section 78 was justified.