TaxTMI 
TaxTMI 
2025 (1) TMI 939
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....2. The appellants are engaged in the business of letting out motor tugs on hire basis to various port trust authorities and have obtained Service Tax registration under the category of 'Port Services'. The appellant entered into a hire agreement with M/s Murmagao Port Trust, Goa (MPT) on 25.05.2007 for the purpose of providing motor tug named 'MV Sigma' on hire basis subject to certain terms and conditions mentioned in the agreement (hereinafter referred to as the contract). Consequent upon scrutiny of the documents during the audit proceedings, the Department was of the view that supply of tug by the appellants to MPT on hire basis without involving any legal right of possession and effective control, is classifiable under the category of 'Supply of Tangible Goods' (STG) and not as 'Transfer of Right to Use Goods'. The appellant's main submission is that their activities fall under the category of transfer of right to use tug and not under STG and therefore, they are not required to pay any Service Tax and instead, their activities require them to discharge VAT duty in terms of statutory provisions under VAT Act and Rules, where this activity would be termed as 'deemed sale'. Acco....
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....mmarized below for ease of reference : - Sl No BSNL Judgement test Condition fulfilled Yes or no M/s Sea Sparkle agreement clause 1 (a) there must be goods available for delivery No The Hire Agreement is for hiring a tug for service which are described in para b of the agreement "b. On the date of the commencement of the hire the said Tug shall be tight, staunch, strong and in every way fit for the purpose of the hire andshall be manned with full complement of qualified and experienced Master, Officers and crew to be employed n the services of berthing and underthing of vessels at Mormugao Port or other places outside of the Port limits as determined by the Board, and including towing and rescue operations as necessary (hereinafter called 'the said service')" The services that are to be rendered are berthing and unberthing of vessels and initially the Tug sigma is identified for this purpose. But in case of out of operation of the tug Sigma an alternate tug is to be provided which is enumerated at clause q of the agreement "q. In the event of the said Tug is out of operations for any reasons whatsoever....
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....rmission from the Deputy Conservator) and the revenues earned is to be shared between the contractor and board as is evident from clause s of the agreement "s. All salvage rendered to other vessels shall be for the Board's and Contractor's equal benefit after deducting all lawful expenses including additional insurance, if any, hire paid under the agreement for time lost in the salvage and other repair or damage and fuel consumed. No salvage shall be undertaken without the explicit orders of the Deputy Conservator. The Master of the tug shall take all measures to secure payment of salvage, as instructed by the Deputy Conservator, who shall be the sole authority to enter into any agreement for salvage." 5. (e) having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others." Yes 5. Learned AR has, inter alia, relied on the case of M/s KP Mozika Vs Oil and Natural Gas Corporation Ltd (supra), wherein, the Hon'ble Supreme Court, after considering the following judgments at Para 32 & 33, observed as under:- a) State of Madras Vs. Gannon Dunkerley & Co.....
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....of the transactions referred to in sub- clauses (a) to (f) of clause (29A) of Article 366. The works contracts, hire purchase contracts, supply of food for human consumption, supply of goods by association and clubs, contract for transfer of the right to use any goods are some such economic activities. 53.2 The transfer of the right to use goods, as distinct from the transfer of goods, is yet another economic activity intended to be exigible to State tax. 53.3 There are clear distinguishing features between ordinary sales and deemed sales. 53.4 Article 366(29A)(d) of the Constitution implies tax not on the delivery of the goods for use, but implies tax on the transfer of the right to use goods. The transfer of the right to use the goods contemplated in sub-clause (d) of clause (29A) cannot be equated with that category of bailment where goods are left with the bailee to be used by him for hire. 53.5 In the case of Article 366(29A)(d) the goods are not required to be left with the transferee. All that is required is that there is a transfer of the right to use goods. In such a case taxable event occurs regardless of when or whether the goods are d....
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....of control and possession vested with transferee and thus, not applicable to the present case. He has also submitted that unlike KP Mozika case where it was held that there was no transfer of right to use due to certain conditions like the contractor was liable to take care of legal consequences of using the cranes or were required to pay for consumables or that crane must be moved and operated by crew, in the instant case in addition to the insurance provided by the appellant, the protection and indemnities available to the tugs owned by MPT are also extended to the tugs owned by the appellant while engaged in duty. Moreover, the cost of fuel, lubricants, port charges are solely borne by the MPT and not by the appellant and there is clear provision that the master and crew provided by the appellant are under the orders and directions of the Deputy Conservator of MPT. Therefore, MPT is in control of the tugs even though the master and crew are provided by the appellant. Learned Counsel has also given reasons that in the facts of the contract between the appellant and MPT, there is no case of STG and how it is different from KP Mozika case, as relied by the department. The same is s....
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....Tug shall be tight, staunch, strong and in every way fit for the purpose of hire and shall be manned with fun complement of qualified and experienced Master, Officers and crew...... (h) The Master shall be under the orders and directions of the Deputy Conservator regarding operation of the said services. (f) If the Deputy Conservator or his representative complains to the Contractor that they are dissatisfied with the Master or to the Master that they are dissatisfied with any member of the Officers or the crew, the Contractor or the Master shall investigate such complaint and if necessary will remove the person complained of and appoint another in his place within seven days of lodging the complaint. Distinction Though the staff and crew is provided by the Appellant, unlike in the case of K. P. Mozika the master and crew have to operate under the instructions and orders of the Deputy Conservator (appointed by MPT). Further, in case of any complaint by the Deputy Conservator, MPT regarding the Master or the crew, the Appellant is required to take action. Thus, the control over the Master and crew lies with MPT and such a clause is not available in the case of K. P. ....
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....age dues (incurred after delivery and before redelivery). fuel, lubricants (excluding hydraulic oils) and fresh water remaining on board on the day of commencement of hire will be paid for by the Board at rates prevailing in Goa. Fuel, lubricants (excluding hydraulic oils) and fresh water remaining on board on termination of contract will be paid for by the Contractor at rates prevailing in Goa, ........ Distinction In the case of K.P. Mozika the contractor is liable to pay the cost of consumables. However, in the instant case, MPT only is liable to bare all cost of fuel, lubricants (excluding hydraulic oils) fresh watery, Port charges, pilotage, dock, harbor and tonnage due, buoyage due in respect of the goods transferred to MPT. 5. Para 34 of K. P. Mozika (viii) The contractor will be solely responsible and shall keep ONGC indemnified against any consequence under any law arising from any accident caused to the equipment/property/personnel engaged in the contract. Even for damage or injury to any third party due to the operation of cranes, the contractor will be responsible. The contractor shall safeguard his interest through comprehensive insurance at hi....
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.... (c) and (d) is not met. 6. Para 34 of K. P. Mozika (ix) It will be the contractor's responsibility to arrange parking of the cranes at selected places. However, the contractor shall be responsible for providing the cranes at the requisite site at the requisite time; Sea Sparkle agreement o) the board hereby covenants that the said tug shall be used at Mormugao Port or any other place outside the port limits as determined by the deputy conservator. Distinction In the case of K. P. Mozika, ONGC does not take the responsibility of even parking the cranes as the same are within the control of the contractor. There is no similar clause in the agreement of the Appellant since the Appellant is not in control and possession of the tug. The tugs are in control and possession of MPT, thus the parking and harboring is as per the instructions or requirements of MPT. 7. Para 36 of K. P. Mozika The contract concerns hiring services of ten truck-mounted all-terrain hydraulic cranes with the crew and clause 2 provides that the supply of equipment will not be by way of lease or transfer or right to use the equipment. The cont....
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..... P. Mozika, there is no fixed payment for hiring of trucks. Therefore, the payment is based on transportation. However, in the case of the Appellant, regardless of use or not, MPT pays the Appellant charges for the tug per day. 10. Para 39 of K. P. Mozika (i) The contractor shall remain fully responsible to IOCL for custody of the product, its quantity and quality; Sea Sparkle No such clause in the Agreement Distinction In the case of K. P. Mozika, the contractor is responsible for custody of the products because effective control and possession is not given to ONGC. Thus, they are liable for any loss of goods. However, in the instant case there is no such clause. Considering the above, in the case of K. P. Mozika it was held that the contract is for providing tank trucks for transportation of goods and once goods are loaded, it would be the responsibility of the contractor for safety during transit. Based on the above finding it was held that test (c) of BSNL was not satisfied. 7. In addition, learned Advocate has also relied on the case of Great Eastern Shipping Company Ltd Vs State of Karnataka & Ors., [2020 (32....
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....ecially the contract dt.25.05.2007, the activities of the appellant in relation to MPT would be classifiable under Section 65(105)(zzzzj), as service under 'Supply of tangible goods' or it would be in the nature of 'deemed sale' and therefore, liable to VAT not liable to Service Tax:- 12. The core issue, which is to be decided in these appeals, is whether the hiring of motor tug by MPT from the appellant is also involving transfer of legal right to possession and effective control to MPT from appellant or otherwise. If no transfer of legal right to possession and effective control, the same transaction would amount to service, as proposed by the department, under the heading 'Supply of tangible goods'. It is important to examine and analyze the contract because if there is a transfer of right to use the goods, it will amount to sale in terms of clause 29A(d) of Article 366 of the Constitution of India. The issue as to whether contract is a contract for service or it involves deemed sale was dealt with in detail in the case of BSNL (supra) where the issue whether there was sale of goods that would attract sales tax or a service that would attract service tax under Entry 97 of Lis....
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....s deemed sale of goods. Therefore, whether a transaction involves transfer of right to possess and effective control is a question of fact and needs to be decided based on the terms of contract and other material evidence. 15. The contract dt.25.05.2007 has been titled as "hire agreement" where it was mutually agreed by both the parties that the appellant will provide and let the motor tug 'sigma' to the MPT and that the MPT shall hire the said tug subject to the certain conditions. The said hire of the tug was subject to various conditions and both sides have cited different conditions in support of their argument that there has not been any transfer of legal right of possession and effective control. While the department is insisting that the test for determining whether there has been a transfer of legal right of possession and effective control has not been satisfied, if various conditions of the contract are analyzed holistically, whereas, the appellants have also relied on the same contract and certain conditions, to support that those tests are fully complied with. 16. The conditions of BSNL judgment and argument as to whether it has been complied or nor are elucidated....
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.... risk insurance shall be deposited with Deputy Conservator and also the fact that the contractor has the same protection and indemnities available to tugs owned by MPT, while on duty and therefore, they have the legal right to use the tug along with legal consequences. d) For the period during which the transferee has such legal right, it has to be the exclusion to the transferor - this is the necessary concomitant of the plain language of the statute viz., a 'transfer of right to use' and not merely a license to use the goods:- According to the department, during the hire period, the tug can be used for salvage operations (upon permission from the Deputy Conservator) and the revenues earned is to be shared between the contractor/appellant and MPT, as is evident from clause 's' of the contract. In fact, the responsibility is on the master of the tug to take all measures to secure payment of salvage, as instructed by the Deputy Conservator, who shall be the sole authority to enter into any agreement for salvage. Thus, the test 'd' is not fully satisfied. Moreover, there is a formula for sharing the expenses for the time lost on account of undertaking salvage operations in c....
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....costs for maintaining her classification certificates. Effectively, this would mean that during the period of contract, apart from providing skilled manpower to operate the tug, its repairs and other statutory compliances are with the appellant and not with the MPT. Further, there is a clear clause, whereby, the MPT will not be liable against third party claim for which the appellants are required to take appropriate insurance and provide copy of the said insurance to the MPT. This clause would indicate that the MPT will take shelter behind the insurance which has been undertaken by the appellant in case of any loss or damage to third party except for certain protection and indemnities, while engaged on duties as instructed by Deputy Conservator as are available to tugs owned by MPT. This provision is also subject to the condition that damage occurred is not due to failure of the tug or due to error committed by the master and crew of the tug. This would again indicate that there would not be any taking over the legal consequences of hiring the said tug and certain conditions have been stipulated basically to indemnify MPT as also for non-compensation in certain events as per claus....
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....ort clearance will be arranged by the MPT and the contractor will be required to post MPT's crew on board the tug, if required to comply with the regulations. This would obviously mean that in relation to certain operations, this tug and its complement of master and crew cannot be used as such by MPT and it may require the presence of crew of MPT for meeting certain statutory regulations. Therefore, if there is transfer of legal right to use as well as effective control, there would not have been any need to take permission or deploy separate crew and it could have been used by MPT as if it was their tug with their own crew. 22. We also note that various decisions exist on the issue as to how to interpret a contract. In the case of GS Lamba & Sons, Secunderabad & Others Vs State of Andhra Pradesh [2011 (52) APSTJ 191], the Hon'ble High Court of Andhra Pradesh, inter alia, held that while interpreting a contract, the first principle is to construe the document as a whole and the second principle is to understand the meaning of a document or a part thereof from the document itself. The third principle is to give literal meaning to the words used in the document and the fourth prin....
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....not considered as deemed sale, there is no question of payment of VAT. Therefore, it would be a service and since it satisfies the criteria for classification under STG, it is rightly classifiable thereunder. Reliance placed on circular is also misplaced as they are not of binding nature and merely clarifications, as they clarify that supply of tangible goods for use and leviable to VAT as deemed sales will not come under the purview of Service Tax. Conversely, if the transaction cannot be treated as deemed sale, it would come under the purview of Service Tax. We have already held that the present transaction is not a contract involving 'deemed sale'. (B) Whether in the event of the activities being classifiable under 'Supply of tangible goods', the taxable event i.e., signing of contract, being prior to introduction of service would lead to non-levy of Service Tax on the considerations received post introduction of the service or otherwise:- 25. By way of an alternative argument, the appellants have tried to argue that in this case, since hire agreement itself was signed prior to introduction of specified service and therefore, relying on the judgment of Petronet LNG Ltd Vs ....
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....count, the demand for Service Tax for the period prior to introduction of STG i.e., 01.03.2008 will not sustain on this count itself. 27. Whereas, in terms of POTR, 2011 and in this case, since it is a continuous supply, the event is to be determined in accordance with Rule 6 of POTR, which, inter alia, provides that in case of continuous supply, the point of taxation shall be the time when the invoice for service provided or to be provided is issued. In this regard, it is observed that as per clause 'j', the MPT is required to pay on monthly basis at a specified rate. Clause 'j' is reproduced below, for ease of reference:- "j. The board shall pay the hire of the said Tug monthly at the following rate : Indian Rs 1,04,580/- (Rupees One Lakh Four Thousand Five Hundred and Eighty only) per day or part thereof not later than the seventh day of every succeeding month of hire, on submission of certificate of satisfactory service from the Deputy Conservator. Day to be considered from 12 noon to 12 noon." 28. Therefore, it is evident that the payments are being received before 7th day of the succeeding month of hire on submission of certificate of satisfactory serv....
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....ase, the department has not been able to produce any positive evidence about the appellant's intent to evade payment of Service Tax or deliberately suppressing the relevant facts with intent to evade payment of Service Tax. Considering the complex nature of classification of STG without transfer of legal right to use and effective control vis-à-vis, provisions under the VAT Rules for deemed sale, there is some relevance in the arguments that they were under bonafide belief that the transaction would not be a transaction of supply of service rather it will be covered by deemed sale, more so when they got a clarification from the statutory authority under VAT laws, which may not be binding on Service Tax authority working under the provisions of the Finance Act, 1994. 31. We find much force in the contention of the appellant that they were under bonafide belief, especially, when they had got clarification from the concerned commercial tax authorities and in fact, they started paying VAT also. Thus, merely because a copy of the contract was found in the course of audit, in the absence of any positive and cogent grounds for invoking extended period or for imposing penalty, et....
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....uggest that transaction is one where deemed sale might be involved but there is nothing to deter the authority working under the Finance Act to examine the same transaction to find out whether there is any deemed sale as such. Thus, while both levies are mutually exclusive but the facts need to be ascertained to come to conclusion whether deemed sale is involved or otherwise. A mere discharge of VAT, per se, would not absolve them from the leviability, if the said discharge of VAT is not tenable in the facts of the case. They have placed reliance on the case of Imagic Creative (P.) Ltd. Vs. Commissioner of Commercial Taxes & Ors (supra), wherein, inter alia, it was held that payment of Service Tax and VAT are mutually exclusive, therefore, they should be held to be applicable having regard to respective provisions of Service Tax and Sales Tax, as envisaged in composite contract. This is not an issue in the present appeal and what has been decided that entire contract itself is that of service and not deemed sale. They have also relied on the other case laws in support but we find that since we have categorically found that the contract involves only service i.e., STG and no element....