Transfer of right to use machinery excluded service tax where possession and effective control passed to the lessee.

Leasing of machinery was held not to constitute taxable supply of tangible goods service where the equipment was delivered to the lessee's premises for its exclusive use during the lease period, and the lessor was excluded from using or assigning it to others. Applying the settled test for transfer of right to use goods, the decisive factors were transfer of possession and effective control. As the transactions were treated as deemed sales and VAT had been discharged, the service tax demand under the cited Finance Act provisions was held unsustainable, with consequential relief following.

---

---

Issues: Whether leasing of machinery amounted to taxable service under the category of supply of tangible goods right to use tangible goods, and whether the impugned demands were sustainable.

Analysis: The lease arrangements showed that the machinery was delivered to the lessee at its premises for use during the lease period, with the lessee entitled to use the machinery for its own purposes and the lessor disabled from using or assigning the same to others during that period. The Tribunal applied the settled test for transfer of right to use goods and held that the decisive factors were transfer of possession and effective control. Since the transactions were treated as deemed sales and VAT had been discharged, the activity did not fall within taxable supply of tangible goods service under Section 65(105)(zzzzj) of the Finance Act, 1994 or the declared service provision relied upon by the Revenue.

Conclusion: The demand of service tax was not sustainable and the appeals were allowed with consequential relief.

---