2025 (11) TMI 1278 - AT - Service Tax

Service tax demands quashed: machinery lease not taxable under Section 65(105)(zzzzj); exhibitions treated as export services

M/s Eastman Impex Versus Commissioner of Central Excise & Service Tax, Ludhiana, Punjab

CESTAT Chandigarh-AT allowed the appeal, setting aside the service tax demands. It held that leasing of machinery did not fall under 'supply of tangible ... Levy of service tax - supply of tangible goods service - reverse charge mechanism - appellants have leased out machineries and the effective control of the machinery was not transferred to the lessees - Business Exhibition Services - Business Support Service. Supply of tangible goods service - reverse charge mechanism - appellants have leased out machineries and the effective control of the machinery was not transferred to the lessees - HELD THAT:- It is found that as per Section 65 (105) (zzzzj) of Finance Act, 1994 defines taxable service to mean any services 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, equipment and appliances.' - It is found that Revenue has lost sight of the fact that the right of possession of the machinery has been transferred as the machinery is set up at the premises of lessee. Thus, out of the two conditions of Transfer of Right of Possession and Effective Control, the first one is not satisfied as the possession of the machinery has been given. Unless the two conditions are satisfied, the service cannot be said to be of supply of tangible goods. On this count alone, the Department’s argument fails. Business Exhibition Services - HELD THAT:- The expenses are related to the exhibition held outside India for which payment was made outside India to the organisers of the event. The service is provided and received outside India and therefore, the same are not exigible to service tax. Moreover, it is found that the expenses related to purchase of material for display in exhibition and ocean freight incurred on this count came to be included in the Business Exhibition Services w.e.f 01.05.2011; the demand of Rs.6,48,045/- in this case being for a period up to 28.02.2011, the demand is not sustainable. We also find that in terms of Rule 3 (ii) of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, such service would have been taxable if the same is performed in India; as the services were performed outside India, we find that the expenses on exhibitions held outside India cannot be taxed at the hands of the appellants during the relevant period. Business Support Service - HELD THAT:- CBEC clarified, vide F. No. B-11/03/98-TRU dated 07.10.1998, the Market Research Agency Services include research relating to development of market for a product; in the instant case, the service availed is not about a particular product cannot be held to have been received in India; therefore, the demand cannot be sustained on this count also. The argument of the Revenue is not acceptable and therefore, the impugned order cannot be sustained - the case of the Revenue does not sustain on merits, the arguments on time bar etc. become redundant - Appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether rentals received for leasing of machinery constitute 'Transfer of Right to Use Goods' (taxable as supply of tangible goods service) where machinery is installed at lessee's premises and agreement preserves certain repair/loss obligations with lessee. 2. Whether amounts paid for participation in and expenses relating to business exhibitions held outside India (including participation fee, purchase of display material, ocean freight, hotel rent) are exigible to service tax under Business Exhibition Service or under reverse charge/deeming provisions applicable to services provided from outside India. 3. Whether fees remitted to foreign market-research/service providers for research on the appellants' products in a foreign country are taxable in India under Business Support Service on reverse charge basis. 4. Whether invocation of the extended period of limitation is permissible where the tax demand arises from legal interpretation issues and where the recipient could have availed input credit (revenue-neutral element). ISSUE-WISE DETAILED ANALYSIS - 1. Transfer of Right to Use Tangible Goods (Lease) Legal framework: Section 65(105)(zzzzj) of the Finance Act, 1994 defines taxable service in relation to supply of tangible goods including machinery where such supply is without transferring right of possession and effective control. CBEC Education Guide and legal tests established in precedent on transfer of right to use and effective control inform analysis. Precedent treatment: The court considered earlier Supreme Court decisions on similar tests of transfer of right to use (principles relied upon by Revenue) and noted authorities cited by parties. Recent decisions cited by Revenue were examined but not treated as mandating a contrary result on the facts. Interpretation and reasoning: The agreement transferred physical possession by installation of machinery at lessee's premises and granted the lessee unfettered use during the lease term. Clauses allocating repair, loss and damage risk to the lessee were held to be of a general contractual nature and not determinative that effective control remained with the lessor. Both conditions (transfer of possession and non-transfer of effective control) must coexist to characterise the transaction as a taxable supply of tangible goods service; where possession is transferred, the service cannot be characterised as supply of tangible goods under the provision. Payment of VAT on deemed sale further corroborated transfer of possession. Revenue's reliance on repair/loss clauses to infer retention of effective control was rejected as insufficient to displace the factual finding of transfer of possession and control to the lessee. Ratio vs. Obiter: Ratio - where machinery is set up at lessee's premises and the lessee has exclusive use, and general repair/loss provisions merely allocate maintenance and risk without reserving effective control to lessor, the transaction does not amount to taxable supply of tangible goods service under Section 65(105)(zzzzj). Obiter - observations on interplay with VAT and specific contractual clauses that do not alter possession/control were explanatory. Conclusion: Demand under Right to Use Tangible Goods Service is unsustainable and set aside (excess quantification also identified but principal legal ground disposed demand). ISSUE-WISE DETAILED ANALYSIS - 2. Business Exhibition Services and Services Relating to Exhibitions Held Outside India Legal framework: Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (including Rule 3(ii)), Section 66A (charge on services received from outside India) and applicable amendments governing reverse charge and deeming of services provided from outside India; chargeability depends on location where service is provided and received. Precedent treatment: The Tribunal relied on prior Bench decisions and High Court authority holding that services rendered and received entirely outside India are not taxable in India. CBEC circulars and Rule provisions were considered in context. Interpretation and reasoning: Payments for participation in exhibitions held outside India and related expenses (purchase of display material overseas, ocean freight, hotel rent abroad) were held to be services performed and received outside India. Rule 3(ii) and the reverse charge provisions apply only where service is performed in India or is received in India as per statutory criteria; because performance and receipt occurred outside India, the services were not exigible to service tax for the relevant period. Additionally, expansion of taxable scope to include certain exhibition-related expenses became effective w.e.f. 01.05.2011; the demands related to an earlier period and hence could not be sustained on that statutory extension. Ratio vs. Obiter: Ratio - services provided and received entirely outside India are not taxable under Business Exhibition Service or under reverse charge provisions; statutory expansion of taxable items is effective prospectively from notified date and cannot be applied to prior periods. Obiter - general references to CBEC circular and comparative illustrations of cross-border service rules. Conclusion: Demands in respect of exhibition participation and related expenses for exhibitions held outside India are not sustainable and are set aside for the relevant period. ISSUE-WISE DETAILED ANALYSIS - 3. Business Support Service (Market Research by Foreign Providers) Legal framework: Section 66A, Rule 2(1)(d)(iv) and Section 68(2) govern taxation on services provided from outside India and received in India; CBEC clarification (F. No. B-11/03/98-TRU dated 07.10.1998) defines Market Research Agency Services as research relating to development of market for a product. Reverse charge applies where foreign provider has no office in India and service is taxable under specified clauses and received in India. Precedent treatment: The Tribunal referenced a recent Bench decision (Goodyear India Ltd.) and High Court authority holding that services rendered entirely outside India cannot be taxed in India; Orient Crafts principle (no levy on services rendered and received outside India) was followed. Interpretation and reasoning: The services in question were market research conducted by foreign service providers about the appellants' products in a foreign country and were rendered and received outside India. Rule 3(iii) and reverse charge mechanism presuppose receipt of service in India; that receipt was absent. Therefore, taxing the appellant under reverse charge was contrary to the statutory scheme and the factual finding of extraterritorial performance/receipt. Ratio vs. Obiter: Ratio - market research services rendered and received wholly outside India are not taxable under Business Support Service reverse charge provisions; deeming rules do not apply where receipt in India is absent. Obiter - discussion of statutory provisions and illustrations reproducing Sections/Rules for context. Conclusion: The demand under Business Support Service on reverse charge basis is unsustainable and set aside. ISSUE-WISE DETAILED ANALYSIS - 4. Extended Period of Limitation Legal framework: Provisions permitting extended period of limitation where suppression, fraud, or wilful misstatement exist; limitation ordinarily five years unless extended period is appropriately invoked under statutory tests. Precedent treatment: Parties relied on authorities concerning invocation of extended period where legal questions are debatable and where no deliberate concealment is established; Tribunal considered such authorities as context for deciding applicability. Interpretation and reasoning: Having found the substantive demands unsustainable on merits, the Tribunal treated arguments on limitation and extended period as redundant. Additionally, where disputes arise from legal interpretation and reasonable alternative views have been taken in other fora, invocation of extended period and penal consequences are less compelling absent factual finding of concealment or fraud. The appellant's ability to avail input credit rendered the matter revenue-neutral, further weakening justification for extended period in this factual matrix. Ratio vs. Obiter: Obiter - holding that extended period argument is redundant once substantive demand fails; explanatory observation that extended period is not to be invoked where issue is legal interpretation and bona fide difference of opinion exists, absent concealment. Noted that no separate finding of fraud or suppression was sustained. Conclusion: Issues of time bar and extended period need not be decided in light of merits ruling; extended period was not relied upon to sustain demand. Disposition: The Court allowed the appeal and set aside the impugned demands on all considered counts.