Arrangement and management of supplier-owned spare parts at customer premises not taxable as "supply of tangible goods" service

CESTAT allowed the appeal, holding the arrangement-placement and management of spare parts at customer premises with ownership retained by the supplier-does not attract service tax as a "supply of tangible goods service." The Tribunal found no factual distinction from earlier proceedings and noted VAT/CST was discharged on a deemed-sales basis, which precludes service tax liability. Although the appellant failed to notify the Bench of an identical earlier decision, the majority concluded no service tax is payable and the appeal is allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether the activity of placing and managing critical spare parts at customers' premises, with quarterly consideration charged and VAT/CST paid, is classifiable as "supply of tangible goods for use" under Section 65(105)(zzzzj) of the Finance Act, 1994 (and thus a taxable service), or whether it amounts to a sale/deemed sale subject to sales tax/VAT and therefore outside the ambit of service tax.

2. Whether payment/chargeability of sales tax/VAT on the consideration is a determinative test that precludes levy of service tax on the same consideration.

3. Application and relevance of the legal test for "transfer of the right to use any goods" (Article 366(29A)(d) and related jurisprudence) vis-à-vis the ingredients of Section 65(105)(zzzzj) (supply for use without transfer of possession/effective control).

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Classification - "Supply of tangible goods for use" under Section 65(105)(zzzzj) v. sale/deemed sale (VAT)

Legal framework: Section 65(105)(zzzzj) defines a taxable service as service provided in relation to the supply of tangible goods for use without transferring right of possession and effective control. Article 366(29A)(d) (constitutional deeming) treats certain transfers of right to use goods as deemed sale for VAT/sales tax. CBIC Circular D.O.F. No. 334/1/2008-TRU (29.02.2008) clarifies overlap: where VAT is payable/paid as deemed sale, service entry will not cover that transaction; Section 65(105)(zzzzj) targets supplies for use without transfer of possession/effective control.

Precedent treatment: The Court/Tribunal examined Supreme Court authority (BSNL) and later decisions (Great Eastern Shipping; Adani Gas) interpreting Article 366(29A)(d), the distinction between sale/transfer of right to use and service, and criteria for "transfer of right to use". Tribunal and High Court precedents (e.g., Shipowners) and Tribunal orders (including earlier Final Order Nos.70660-70662/2019 concerning identical facts) were considered.

Interpretation and reasoning (Majority - Member (Judicial) and Third Member): The majority found documentary and contractual evidence establishing that the appellant treated the transactions as deemed sale for VAT/CST (invoices show VAT/CST charged and paid). The CBIC circular and earlier Tribunal orders establish that when the transaction is subjected to sales tax/VAT as a deemed sale, it is not amenable to service tax as an STGU (supply of tangible goods for use). The majority concluded that the essential nature of the transaction, as evidenced by agreement terms and tax treatment, was sale/deemed sale and therefore service tax demand under Section 65(105)(zzzzj) could not be sustained.

Interpretation and reasoning (Dissent - Member (Technical)): The dissent applied the BSNL/Adani Gas/Great Eastern tests emphasizing substance over labels: Section 65(105)(zzzzj) targets services involving supply of goods for use without transfer of possession/effective control. The dissent found facts demonstrating that ownership, possession and effective control remained with the supplier and that the recipient only had "use." On that basis, the activity fit the STGU definition and service tax was payable; payment of VAT alone does not preclude service tax if the transaction in substance satisfies STGU ingredients.

Ratio vs. Obiter: The majority's holding that VAT payment and prior Tribunal decisions concluding deemed sale supply are determinative for the period/transactions before it is the operative ratio of the final decision. The dissent's exposition applying the BSNL/Adani Gas tests constitutes authoritative reasoning on interpretation of Section 65(105)(zzzzj) but is obiter in the majority outcome (expressing a contrary conclusion on the facts).

Conclusion: By majority, the impugned service-tax demand was set aside because the consideration was subjected to VAT/CST as a deemed sale and prior identical Tribunal rulings in respect of the same appellant and period favoured the appellant; therefore, the transactions were not STGU services for purposes of service tax.

Issue 2: Whether payment of sales tax/VAT is the necessary test for non-levy of service tax

Legal framework: CBIC Circular (29.02.2008) and earlier Departmental clarifications treat payment/chargeability of VAT/sales tax as an indicium that a transaction is treated as a sale/deemed sale; constitutional and statutory tests (Article 366(29A)(d) and Section 65(105)(zzzzj)) remain the underlying legal benchmarks.

Precedent treatment: The majority relied on Tribunal's prior orders (Final Order Nos.70660-70662/2019) and decisions holding that where VAT/sales tax is charged/paid, service tax will not be leviable (Express Engineers and other Tribunal/bench precedents). The dissent relied on Supreme Court authorities (BSNL, Great Eastern, Adani Gas) clarifying that payment of VAT alone does not automatically exclude service tax - substance and contractual rights control the levy.

Interpretation and reasoning: The majority treated the payment of VAT/CST as strong (decisive) evidence that the transaction was a deemed sale and therefore excluded from service-tax coverage in light of CBIC circular and prior tribunal findings. The dissent rejected treating VAT payment as a conclusive test; rather, it emphasized that whether a transaction attracts sales tax or service tax depends on an analysis of contractual terms and whether possession/effective control is transferred (BSNL test), and that simultaneous taxation is not permissible but labels/payments alone cannot determine substance.

Ratio vs. Obiter: The majority's practical rule-that charging and payment of VAT on the consideration evidences a deemed sale and forecloses service tax for the transactions at hand-is the basis of the final disposition. The dissent's principle that VAT payment is not per se determinative but fact and substance govern taxation is a contrary legal thesis but not adopted in the majority decision.

Conclusion: For the record facts and on precedent specific to the appellant (including prior tribunal orders accepted by the department), the majority concluded that VAT/CST payment was dispositive and precluded service-tax liability; the technical member disagreed, holding the VAT test insufficient as a legal rule.

Issue 3: Application of the Supreme Court tests for "transfer of right to use" and the elements required to characterise a transaction as deemed sale

Legal framework: BSNL and subsequent Supreme Court authorities laid down attributes to constitute transfer of right to use (goods available for delivery; consensus ad idem on identity; transferee has legal right to use including required permissions; exclusivity of right for the period; owner cannot re-transfer same right). Great Eastern and Adani Gas applied those criteria to charter/lease and supply arrangements.

Precedent treatment: The dissent applied those tests to find transfer of "use" lacking possession/effective control transfer (favouring service characterization under Section 65(105)(zzzzj)). The majority noted those tests but focused on contemporaneous tax treatment (VAT) and earlier Tribunal findings applicable to identical facts.

Interpretation and reasoning: The dissent used the BSNL five-part test to conclude that the supplier retained possession and effective control and the recipients had use only; hence, STGU applied. The majority emphasised that if parties and taxing authorities treated the transaction as a deemed sale (VAT charged/paid) and prior adjudication reached the same result, that factual/administrative posture supports treating the transactions as sales for the relevant periods.

Ratio vs. Obiter: The dissent's application of BSNL is persuasive for future factually similar disputes where VAT treatment is absent or contested; however, the final Tribunal ruling rests on the majority's finding of conclusive VAT treatment and prior Tribunal precedent specific to the appellant.

Conclusion: The Supreme Court tests remain the legal yardstick to decide whether a transaction effects a transfer of right to use (deemed sale) or remains a service; but where contemporaneous contractual terms, invoicing, and prior adjudication show VAT/sales tax treatment and the Department has not contested that factual matrix, those factors may determine the outcome as they did here.

Final Disposition

By majority, the service-tax demand under Section 65(105)(zzzzj) was set aside and the appeal allowed with consequential relief because the consideration was subjected to VAT/CST as deemed sale and prior Tribunal orders on identical facts in favour of the taxpayer had reached finality; the technical member dissented, applying the BSNL/Adani Gas/Great Eastern tests to conclude the activity qualified as "supply of tangible goods for use" and service tax should be leviable. The matter was referred on points of difference and resolved in favour of the majority position.

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