Transfer of right to use goods: equipment hire treated as deemed sale, excluding service tax and double levy.

Rental of equipment amounts to a transfer of the right to use goods when the equipment is identified, placed under the customer's possession and effective control, and the owner cannot confer the same use on others during the hire period; such a transaction is treated as a deemed sale and falls outside service tax as supply of tangible goods service. Where VAT has been discharged on that deemed sale, service tax cannot again be levied on the same turnover, and a post-01.07.2012 demand must also rest on the applicable negative list regime. On that basis, the tax, interest and penalty demands were held unsustainable.

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Issues: (i) Whether the rental of equipment amounted to transfer of right to use goods and, therefore, deemed sale liable to VAT/CST rather than supply of tangible goods service; (ii) whether service tax could be sustained where VAT had been discharged and the post-01.07.2012 demand was not founded on the applicable negative list regime.

Issue (i): Whether the rental of equipment amounted to transfer of right to use goods and, therefore, deemed sale liable to VAT/CST rather than supply of tangible goods service.

Analysis: A transaction is a transfer of right to use goods when the goods are available for delivery, the identity of the goods is ascertained, the transferee has the legal right to use them, the transferee enjoys exclusionary possession and effective control during the period of use, and the owner cannot transfer the same right to others during that period. On the facts, the equipment was placed under the customer's possession, custody and control, the customer bore the risk, and the contractual terms showed that the effective control stood transferred. Such a transaction falls within the constitutional concept of deemed sale and outside the scope of service tax as supply of tangible goods service.

Conclusion: The transaction was a deemed sale by transfer of the right to use goods and not taxable as supply of tangible goods service.

Issue (ii): Whether service tax could be sustained where VAT had been discharged and the post-01.07.2012 demand was not founded on the applicable negative list regime.

Analysis: VAT and service tax are mutually exclusive in respect of the same transaction when the transaction is one of sale by transfer of the right to use goods. Once VAT had been paid on the rentals, service tax could not again be demanded on the same turnover. The demand for the later period also could not survive when it was confirmed on an inapplicable pre-negative-list charging provision. Consequential interest and penalty also fell with the principal demand.

Conclusion: Service tax was not payable, and the demands of tax, interest and penalty were unsustainable.

Final Conclusion: The impugned orders were set aside and the appeals were allowed with consequential relief.

Ratio Decidendi: Where equipment is hired under terms that transfer possession and effective control to the customer and VAT is paid on the resulting deemed sale, service tax cannot be levied on the same transaction as supply of tangible goods service.

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