Transfer of the right to use tinting machines creates a deemed sale, excluding lease rentals from service tax.

Lease rentals for tinting machines constitute a deemed sale where the lessee receives possession, the legal right to operate the identified equipment during the lease term, and effective control, while the owner cannot simultaneously transfer that right to another person. Restrictions on location, servicing, inspection, specified use and return of the equipment do not negate transfer of the right to use goods. Applying the five-part test and the departmental clarification, such arrangements fall within Article 366(29A)(d) of the Constitution rather than declared service treatment for hiring or leasing without transfer of that right. The rentals are therefore not liable to service tax, and related demand, interest and penalties are unsustainable.

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Issues: Whether lease rentals received for tinting machines supplied to dealers constituted consideration for a taxable declared service or a deemed sale involving transfer of the right to use goods.

Analysis: The lease agreement identified the equipment, provided for its delivery and acknowledged receipt by the lessee. The lessee had possession and a legal right to operate the equipment at its premises during the lease period, bore the legal consequences of its use, and the equipment could not simultaneously be transferred to another person. The contractual restrictions concerning location, servicing, inspection, use for specified products and return on termination did not displace the lessee's possession and effective control. VAT had also been paid on the lease rentals. Applying the five-part test for transfer of the right to use goods and the applicable departmental clarification, the arrangement fulfilled the requirements of a deemed sale under Article 366(29A)(d) of the Constitution of India, rather than a transfer by hiring or leasing without transfer of such right under Section 66E(f) of the Finance Act, 1994.

Conclusion: The lease of tinting machines was a deemed sale and the lease rentals were not liable to service tax; the demand, interest and penalties were unsustainable.

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