Deemed sale on hire of machinery bars service tax when effective possession passes and VAT is paid.

Supply of machinery on hire, where effective possession and control passed to the and VAT was paid, amounted to a transfer of the right to use goods and therefore a deemed sale under Article 366(29A). The activity fell within the VAT domain, so service tax could not be levied again on the same transaction. As the underlying tax demand was unsustainable, the consequential interest and penalties also failed.

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Issues: Whether supply of machinery on hire basis, where effective possession and control were transferred and VAT was paid, constituted a deemed sale so as to exclude service tax liability, and whether the consequential demand of tax, interest and penalties could survive.

Analysis: The activity consisted of supplying JCB, Hydra, excavator and similar machinery to clients on hire, with transfer of effective possession and control. The State VAT authorities had treated the transaction as a deemed sale and levied VAT under the relevant West Bengal value added tax framework. Once the transaction was accepted as a transfer of the right to use goods, it fell within the constitutional concept of deemed sale under Article 366(29A). In such a situation, the levy is in the VAT domain and service tax cannot again be imposed on the same activity. Since the underlying tax demand itself was unsustainable, the accompanying interest and penalties could not be retained.

Conclusion: The activity was a deemed sale and no service tax was payable on it. The demand of service tax, interest and penalties was set aside.

Final Conclusion: The appeal succeeded and the assessee obtained full substantive relief against the impugned tax and penalty demand.

Ratio Decidendi: Where a transaction amounts to a deemed sale involving transfer of the right to use goods and VAT is paid on that transaction, service tax cannot be levied again on the same activity because the two levies are mutually exclusive.

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