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. The reasoning relied on precedent treating such arrangements as transfer of right to use/possession and effective control amounting to deemed sale, and concluded that lease receipts subject to VAT do not separately attract service tax under the supply-of-goods-for-use taxonomy. The appellants VCES-I declaration was not accepted due to a tax difference, but the impugned order was set aside and the appeal allowed, with consequential relief awarded to the appellant.

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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.

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