2026 (1) TMI 1521 - AT - Service Tax

Supply of site analyser machines for use: lease treated as sale of goods for VAT, no service tax liabilityappeal allowed

The issue is whether leasing site analyser machines to clients, with VAT paid on hire charges, attracts service tax as a supply of tangible goods for use. ... Supply of tangible goods for use - Transfer of right to use / transfer of possession and effective control - Deemed sale under Article 366(29A)(d) - Voluntary Compliance Encouragement Scheme (VCES) declaration - whether the supply of site analyser machines let out by the appellant to the clients on payment of VAT, the appellant is liable to pay service tax or not ? - HELD THAT:- We take note of the fact that the appellant has opted VCES-I for payment of Rs.80,25,500/-, but the said VCES-I has not been accepted on account of difference in amount of service tax. Admittedly, in this case, the appellant has supplied the site analyser machines to various clients for use for a certain period and paid VAT on hire charges. In that circumstances, relying on the various decisions discussed hereinabove, the appellant is not liable to pay service tax under the category of “Supply of Tangible Goods for Use Services”. Therefore, the impugned order is set aside and appeal is allowed with consequential relief, if any. Issues: Whether supply of site analyser machines let out on hire to clients (with VAT paid on such transactions) amounts to 'Supply of Tangible Goods for Use' service liable to service tax under the Finance Act for the period in question.Analysis: Relevant statutory provisions defining taxable service and declared services include Section 65B(44), Section 65(105)(zzzzj) for the pre-negative-list period and Section 66E(f) for the post-insertion period; Article 366(29A)(d) supplies the concept of deemed sale by transfer of right to use. The legal test requires (i) supply or transfer of goods, (ii) transfer by way of hire/lease/license, and (iii) absence of transfer of right of possession and effective control. Judicial authorities apply attributes for transfer of right to use including availability of goods for delivery, consensus as to identity of goods, transferee's legal right to use, exclusion of transferor's rights during the period, and inability of owner to re-transfer the same right. Payment of VAT/Sales Tax on the transaction and contractual terms indicating exclusive possession and effective control are material factors indicating a deemed sale under Article 366(29A)(d) and take the transaction outside the scope of service tax. On the facts, the machines were handed over for exclusive use by the recipients, VAT was paid on the hire charges, and contractual and factual indicia show transfer of possession and effective control to the users; accordingly the transactions qualify as transfer of right to use/deemed sale and are not taxable as supply of tangible goods for use service.Conclusion: The supply of site analyser machines on hire (with VAT paid) does not constitute a taxable 'Supply of Tangible Goods for Use' service; the impugned demand, interest and penalties are set aside and the appeal is allowed in favour of the assessee.