Transfer of right to use goods governs equipment hiring, excluding service tax where possession and control pass to the customer.

Equipment-hiring arrangements were treated as transfers of the right to use goods where the customer had possession, control and custody of the equipment, bore the risk of loss or damage, and the supplier retained no effective dominion during the contract term. On that footing, the transactions fell within deemed sales under Article 366(29A)(d) of the Constitution and were not taxable as supply of tangible goods for use under the Finance Act, 1994. The fact that VAT was paid further supported the sale character. Ancillary terms relating to maintenance, commissioning, operators and consumables did not alter the dominant transfer of control. Service tax, with consequential interest and penalties, was therefore not leviable.

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Issues: Whether the equipment-hiring transactions amounted to transfer of right to use goods and deemed sales chargeable to VAT, or whether they constituted taxable service of supply of tangible goods for use under the Finance Act, 1994.

Analysis: The agreements showed that the customers had possession, control and custody of the equipment during the contract term, bore the risk of loss or damage, and were responsible for claims arising from operation, while the appellant could not withdraw or use the equipment for any other purpose during the subsistence of the arrangement. Applying the constitutional distinction between a transfer of right to use goods and a mere permission to use, the decisive test was whether effective control and possession had passed to the customer. The statutory scheme prior to 01.07.2012 taxed supply of tangible goods only when right of possession and effective control was not transferred, while the post-01.07.2012 definition of service excluded transactions amounting to deemed sales under Article 366(29A)(d) of the Constitution of India. The payment of VAT also supported the character of the transaction as a sale rather than a taxable service. The terms relating to maintenance, commissioning, operators and consumables did not displace the overall transfer of dominion to the customers.

Conclusion: The transactions were held to be transfers of right to use goods and deemed sales, so no service tax was leviable under the category of supply of tangible goods for use. Interest and penalties could not survive, and the impugned demands were set aside.

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