2025 (2) TMI 956 - HC - Service Tax

Rental of cinematographic equipment with transfer of possession constitutes deemed sale under Article 366(29A), not taxable service under Section 66

The Madras HC allowed the appeal involving rental of cinematographic equipment. The court held that renting equipment with transfer of possession and ... Levy of service tax or VAT - deemed sale - activity of renting out cinematographic equipment by the appellant - transfer of 'right to use' the equipment - HELD THAT:- Under Section 66 of the Finance Act, 1994, there shall be levied a tax at the rate of 12% of the value of the taxable services referred to in subclause (zzzzj) of clause (105) of Section 65 of the Finance Act, 1994. The “taxable service” means any service provided or to be provided to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipments and appliances. Therefore, where right of possession and effective control is transferred, then it will not be a taxable service. Consequently, if it is not a taxable service, then certainly service tax is not leviable under Section 66 of the Finance Act, 1994. There is not only a transfer of right of possession, but also effective control. The order-in-original has proceeded on an erroneous interpretation of the provisions of this agreement that possession and effective control has not been transferred to the hirer. This conclusion of the adjudicating authority not gareed upon. It is clear from the agreement that the equipments have been supplied for hire and possession and effective control has been transferred to the hirer. The possession and effective control has been transferred. If it is not so, why will the owner reserve a right to inspect the equipments as and when required. If the possession and effective control is still with the owner, he would not need the hirers' permission to inspect. If effective possession and control has not been transferred, why the hirer has to make it known to the owner regarding loss or destruction or damage, after such loss or damage occurs - If possession and effective control is still with the owner or has not been transferred to the hirer, why would the hirer make a statement that he has taken inspection of the goods and he is satisfied with the condition thereof and the owner shall not be liable for any defects. Conclusion - There shall be a deemed sale where there is transfer of the right to use any goods for any purpose – whether or not for a specified period, for cash, deferred payment or other valuable consideration. From the documents and particularly from the clauses reproduced above, it is quite clear that there has been a transfer of the right to use equipments for valuable consideration. Even in clause 29A of Article 366 of the Constitution of India, the only requirement is there should be transfer of the rights to use the goods for valuable consideration. Factually, there has been. The order-in-original cannot be sustained, as it was without jurisdiction. The same is quashed and set-aside - Appeal disposed off. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment were:a) Whether the activity of renting out cinematographic equipment by the appellant constituted a 'deemed sale' under sales tax law, thereby attracting Value Added Tax (VAT) instead of service tax under the Finance Act, 1994.b) Whether the appellant transferred the 'right to use' the equipment, thus excluding the transaction from service tax liability.c) Whether the demand for service tax was justified for the periods August 2010 to June 2012 and July 2012 to December 2015.d) Whether the adjudicating authority had jurisdiction to levy service tax on the transactions in question.2. ISSUE-WISE DETAILED ANALYSISa) Relevant Legal Framework and PrecedentsThe legal framework involved the interpretation of the Finance Act, 1994, specifically Section 65(105)(zzzzj) and Section 66, which define taxable services and the charge of service tax. The Constitution of India, Article 366(29A)(d), and the Maharashtra Value Added Tax (MVAT) Act were also pertinent, as they define the transfer of the right to use goods as a deemed sale subject to VAT. The Supreme Court's judgment in Bharat Sanchar Nigam Limited (BSNL) v. Union of India provided criteria for determining a transfer of the right to use goods.b) Court's Interpretation and ReasoningThe Court distinguished between the periods before and after July 1, 2012, noting that the Finance Act had a positive list before this date and a negative list thereafter. For the period after July 1, 2012, the Court applied the Bombay High Court's judgment in Nayana Premji Savala v. Union of India, which clarified that service tax is not applicable if there is a transfer of the right to use goods. The Court found that the appellant's transactions met the criteria for a transfer of the right to use as outlined in BSNL.c) Key Evidence and FindingsThe Court examined the agreement between the appellant and Chennai Cinema Private Limited, which indicated that the appellant transferred possession and effective control of the equipment to the hirer. The agreement included clauses that the hirer would maintain, insure, and bear the risk of loss or damage to the equipment, reinforcing the transfer of possession and control.d) Application of Law to FactsThe Court applied the principles from BSNL and the MVAT Act, concluding that the appellant's transactions constituted a deemed sale due to the transfer of the right to use the equipment. Consequently, the transactions were subject to VAT, not service tax. The Court also noted that the adjudicating authority failed to apply the correct legal framework and misinterpreted the agreement's provisions.e) Treatment of Competing ArgumentsThe appellant argued that the transactions were deemed sales under VAT law and not subject to service tax. The department contended that the transactions were taxable services. The Court sided with the appellant, finding that the transfer of possession and control excluded the transactions from service tax.f) ConclusionsThe Court concluded that the transactions were deemed sales and not subject to service tax. It quashed the order-in-original, which had imposed service tax, interest, and penalties on the appellant.3. SIGNIFICANT HOLDINGSThe Court held that:'There shall be a deemed sale where there is transfer of the right to use any goods for any purpose - whether or not for a specified period, for cash, deferred payment or other valuable consideration.'The Court established that the transfer of possession and effective control of equipment constitutes a deemed sale, thus excluding such transactions from service tax liability under the Finance Act, 1994.The Court quashed the order-in-original and directed the authorities to consider any refund applications by the appellant without raising limitation issues, as the matter was sub judice.