Transfer of the right to use goods applied to DG set hiring; service tax demand, limitation and penalties failed.

Hiring of diesel generator sets with delivery at the customer's premises was held to be a transfer of the right to use goods, not supply of tangible goods service, because the contractual terms showed transfer of possession and effective control for the agreed period; the service tax demand on that count was unsustainable. On limitation, the record did not establish wilful suppression with intent to evade, so the extended period was unavailable and the consequential interest and penalties did not survive. The order was set aside and relief followed in law.

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Issues: (i) whether hiring of diesel generator sets with delivery at the customer's premises and customer-centric use amounted to supply of tangible goods service or transfer of the right to use goods as a deemed sale; (ii) whether the demand, interest and penalties could survive in view of limitation and alleged suppression.

Issue (i): whether hiring of diesel generator sets with delivery at the customer's premises and customer-centric use amounted to supply of tangible goods service or transfer of the right to use goods as a deemed sale.

Analysis: The transaction had to be tested on the contractual terms and the settled attributes of transfer of right to use goods. Applying the constitutional concept of deemed sale under Article 366(29A)(d) of the Constitution of India and the test laid down for transfer of right to use, the relevant enquiry was whether possession and effective control stood transferred to the customer. The work orders showed delivery of identified DG sets at the customer's site, use during the rental period according to the customer's requirements, and only limited obligations retained by the appellant such as breakdown attention, maintenance and spares. Mere payment of VAT was not conclusive by itself, but on the contractual terms the customer had the effective right to use the goods to the exclusion of the appellant for the agreed period.

Conclusion: The hiring arrangement was a transfer of the right to use the DG sets and not supply of tangible goods service under Section 65(105)(zzzzj) of the Finance Act, 1994. The service tax demand on this count was unsustainable and is decided in favour of the assessee.

Issue (ii): whether the demand, interest and penalties could survive in view of limitation and alleged suppression.

Analysis: Once the main demand was held unsustainable on merits, the foundation for alleging evasion fell away. The record did not establish wilful suppression with intent to evade so as to justify the extended period under Section 73(1) of the Finance Act, 1994. The transportation-related amount already paid before issuance of notice was accepted as settled, and the consequential liabilities of interest and penalties did not survive.

Conclusion: The extended period was not available to the Department, and the penalties under Sections 77 and 78 of the Finance Act, 1994 did not survive. This issue is decided in favour of the assessee.

Final Conclusion: The impugned order was set aside, and the appeal was allowed with consequential relief in law.

Ratio Decidendi: Where the contractual terms show transfer of possession and effective control of identified goods for the agreed period, the transaction is a deemed sale by transfer of the right to use goods and cannot be taxed as supply of tangible goods service; limitation and penalties cannot survive absent proof of wilful suppression with intent to evade.

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