VAT and Service Tax are mutually exclusive on machinery hire transactions deemed as sales

The appellant supplied heavy machinery on hire to clients, which was characterized as 'deemed sale' under Article 366 clause 29A of the Constitution and West Bengal VAT Act. The State Tax Department assessed VAT on these transactions. Revenue subsequently demanded Service Tax on the same supply of machines. The Court held that VAT and Service Tax are mutually exclusive taxes. Since VAT was already paid on the transaction treated as 'deemed sale' involving transfer of right to use goods, no Service Tax liability arose. The demand for Service Tax, interest, and penalties was set aside, and the appeal was allowed.

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1. ISSUES PRESENTED and CONSIDERED

- Whether the supply of machines such as JCB, Hydra, Excavator, etc., by the appellant to various clients constitutes a 'deemed sale' under clause 29A of Article 366 of the Constitution of India and corresponding provisions under the West Bengal VAT Act.

- Whether Service Tax is payable on the said supply of machines when VAT has already been paid on the transaction characterized as 'deemed sale'.

- Whether the demand of Service Tax, interest, and penalties confirmed by the adjudicating authority and upheld by the Commissioner (Appeals) are sustainable in law.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Characterization of supply of machines as 'deemed sale'

The appellant, engaged in supplying heavy machinery on hire, contended that the transaction amounted to a 'deemed sale' under clause 29A of Article 366 of the Constitution of India, which defines 'sale' to include transfer of the right to use goods for any purpose. The West Bengal VAT Act, 2003, specifically Section 2, Clause 39(c), treats such transfer of right to use goods as 'deemed sale' attracting VAT.

The Commercial Taxes and State Tax Department of West Bengal issued a Final Assessment Order under Section 46 of the WBVAT Act, 2003, for the period 01.04.2017 to 30.06.2017, explicitly recognizing the appellant's supply of excavators and similar machines on hire as 'deemed sales' liable to VAT. The appellant had accordingly paid VAT on these transactions.

The Court noted that this characterization as 'deemed sale' by the State Tax authority is significant and binding for the purposes of taxation under the VAT regime.

Issue 2: Liability to pay Service Tax on the same transaction

The Revenue issued a Show Cause Notice demanding Service Tax on the supply of machines for the periods 2015-16, 2016-17, and part of 2017-18, amounting to Rs.48,23,360/- inclusive of cess, along with interest and penalties. The adjudicating authority confirmed the demand and imposed penalties under Sections 77 and 78(1) of the Finance Act, 1994.

The appellant challenged the demand on the ground that Service Tax was not payable since VAT had already been discharged on the 'deemed sale' of the machines. The Commissioner (Appeals) rejected this contention, upholding the demand.

The Court examined the legal framework governing the levy of VAT and Service Tax. It relied on the principle that VAT and Service Tax are mutually exclusive taxes and that once VAT is paid on a transaction characterized as a 'deemed sale' (transfer of right to use goods), Service Tax cannot be levied on the same transaction.

The Court referred to a binding precedent from the Hon'ble Apex Court which held that payment of VAT precludes the imposition of Service Tax on the same transaction. This principle was also echoed by the Tribunal, Chennai in a recent decision involving leasing of JCBs, where the transaction was treated as 'deemed sale' attracting VAT, and Service Tax demand was held unsustainable.

The Court found that the appellant's case was squarely covered by the above principle and precedent. Since VAT was paid on the supply of machines treated as 'deemed sale', no Service Tax liability arises.

Issue 3: Validity of demand of interest and penalties

Since the Court concluded that no Service Tax was payable, it followed that the demand of interest and penalties predicated on the Service Tax demand could not survive. The penalties under Sections 77 and 78(1) of the Finance Act, 1994, and interest demanded are consequential to the tax demand and thus stand set aside.

3. SIGNIFICANT HOLDINGS

"Once the VAT liability is discharged, service tax cannot be demanded since VAT and service tax are mutually exclusive."

"The activity undertaken by the appellant has to be construed as 'deemed sale' and hence, no Service Tax is payable by the appellant on the said activity."

"As the demand of Service Tax does not survive, the question of demanding interest or imposing penalties thereon does not arise."

The Court conclusively held that the supply of machines on hire, involving transfer of the right to use goods, is a 'deemed sale' attracting VAT under the State VAT Act. Consequently, Service Tax cannot be levied on the same transaction. The demand of Service Tax, interest, and penalties confirmed by the lower authorities was set aside, and the appeal was allowed with consequential relief.

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