Transfer of right to use goods: equipment hiring treated as deemed sale, outside service tax and within VAT/CST.

Equipment-hiring transactions were treated as a transfer of the right to use goods where the customer had possession, custody and effective control during the contract period, used the equipment to the exclusion of the owner, and bore the risk. On that basis, the activity fell within deemed sale under Article 366(29A) and within the VAT/CST domain, not service tax under supply of tangible goods service. Because VAT/CST had already been discharged, the service tax demand was held unsustainable and the related penalty was set aside.

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Issues: Whether the equipment-hiring transactions amounted to a transfer of right to use goods, constituting a deemed sale chargeable to VAT/CST and not liable to service tax under supply of tangible goods service.

Analysis: The agreement showed that the equipment was placed under the customer's possession, custody and control during the contract period, with the customer bearing the risk and using the equipment to the exclusion of the owner. Applying the settled tests for transfer of right to use goods, the Tribunal found that transfer of effective control and possession had occurred. Since VAT/CST had been discharged on the transactions, the activity fell within the sales tax/VAT domain and outside the ambit of service tax. The Tribunal therefore held that the service tax demand could not survive.

Conclusion: The transaction was a deemed sale by transfer of the right to use goods, not a taxable service, and the demand of service tax was unsustainable.

Final Conclusion: The appeal succeeded and the impugned service tax demand and penalty were set aside, with consequential relief.

Ratio Decidendi: Where an agreement transfers possession and effective control of goods to the customer for consideration, the transaction is a deemed sale under Article 366(29A) of the Constitution and falls outside service tax on supply of tangible goods.

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