Transfer of right to use goods: hiring cinematographic equipment fell outside service tax where possession and control passed to the hirer.

Madras HC noted that hiring of cinematographic equipment involved transfer of possession, effective control and the legal right to use the goods to the hirer, who bore maintenance, loss and insurance responsibilities and could not be deprived of use during the hire period. Applying Article 366(29A)(d), the Court treated the arrangement as a deemed sale outside the scope of service under Section 65B(44), so the period 1 July 2012 to 31 December 2015 was not liable to service tax. For August 2010 to June 2012, the transaction also failed to meet the charging description of supply of tangible goods without transfer of possession and effective control under Section 65(105)(zzzzj), so the demands and penalties could not stand.

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Issues: (i) Whether hiring of cinematographic equipment for the period 1 July 2012 to 31 December 2015 amounted to a transfer of right to use goods outside the service tax net. (ii) Whether hiring of cinematographic equipment for the period August 2010 to June 2012 attracted service tax under the taxable service of supply of tangible goods without transfer of possession and effective control.

Issue (i): Whether hiring of cinematographic equipment for the period 1 July 2012 to 31 December 2015 amounted to a transfer of right to use goods outside the service tax net.

Analysis: The contract and surrounding facts showed that the equipment was delivered to the hirer, the hirer had legal control during the hire period, bore the risks of loss or damage, maintained and insured the equipment, and could not be deprived of the right to use the goods during that period. Applying Article 366(29A)(d) of the Constitution of India and the settled attributes of transfer of right to use goods, the transaction was a deemed sale. A transaction that is a deemed sale falls outside the definition of service under Section 65B(44) of the Finance Act, 1994, and the transfer of goods by hiring or leasing is taxable only when there is no transfer of right to use. The circular relied upon by the parties also supported this legal position.

Conclusion: The period 1 July 2012 to 31 December 2015 was not liable to service tax, and the demand for that period was unsustainable.

Issue (ii): Whether hiring of cinematographic equipment for the period August 2010 to June 2012 attracted service tax under the taxable service of supply of tangible goods without transfer of possession and effective control.

Analysis: Under Section 65(105)(zzzzj) of the Finance Act, 1994, service tax applied only to supply of tangible goods without transfer of right of possession and effective control. The agreement showed that possession and effective control were with the hirer, who received delivery, used the equipment for its purposes, assumed responsibility for maintenance, loss and insurance, and was restricted from parting with possession. Those features satisfied the attributes of transfer of right to use goods identified in the settled law. Since possession and effective control stood transferred, the transaction did not answer the charging description of taxable service under Section 66 read with Section 65(105)(zzzzj) of the Finance Act, 1994.

Conclusion: The period August 2010 to June 2012 was also not liable to service tax, and the corresponding demands and penalties could not be sustained.

Final Conclusion: The impugned order was set aside because the activity constituted a transfer of right to use goods and not a taxable service, and the appellant was left at liberty to seek refund in accordance with law.

Ratio Decidendi: Where a hiring arrangement transfers possession, effective control, and the legal right to use identified goods to the hirer, the transaction is a deemed sale and is outside service tax; service tax on supply of tangible goods applies only when such right to use is not transferred.

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