Transfer of right to use goods excluded service tax where site analyser machines were given for exclusive use with VAT paid.

Site analyser machines hired out against payment of VAT were treated as a transfer of the right to use goods, not a taxable service of supply of tangible goods for use, because possession and effective control passed to the customer. The governing test is whether the arrangement transfers only custody or also the right of possession and control; where exclusive use and deemed-sale treatment exist, service tax does not apply. On that basis, the service tax demand, interest, and penalties could not be sustained, and consequential relief followed.

---

---

Issues: Whether the supply of site analyser machines on hire against payment of VAT amounted to taxable service under the category of supply of tangible goods for use.

Analysis: The dispute turned on whether the transaction transferred only custody or also the right of possession and effective control. The governing test is that a taxable service exists only where tangible goods are supplied for use without transfer of possession and effective control; where the transaction answers the constitutional concept of a transfer of the right to use goods and is treated as a deemed sale, service tax does not apply. The Tribunal relied on the contractual features of the arrangement, the customer's practical control over the machines, and the fact that VAT had been discharged, which supported the conclusion that the transaction was a transfer of right to use goods and not a mere service. The earlier decisions relied upon were applied on the same principle.

Conclusion: The activity did not constitute taxable service under supply of tangible goods for use, and the service tax demand, interest, and penalties could not be sustained.

Final Conclusion: The appeal succeeded and the impugned order was set aside with consequential relief.

Ratio Decidendi: Where tangible goods are handed over for exclusive use with possession and effective control passing to the customer and the transaction is treated as a deemed sale on which VAT is paid, the arrangement falls outside the taxable service of supply of tangible goods for use.

---