Sales tax and Service tax are mutually exclusive taxes.

PJ/CASE LAW/2014-15/2521

Case:-M/s TANEJA AEROSPACE AND AVIATION LTD Vs COMMISSIONER OF CENTRAL EXCISE, CHENNAI-III

Citation:-2015-TIOL-171-CESTAT-MAD

Brief Facts:- The applicant entered into a lease agreement with a foreign company viz. M/s. Cessna Finance Corporation, Kansas, USA (lessor), to acquire CESSNA make Aircraft on lease for 10 years. The applicant is paying monthly lease rent to the lessor. The adjudicating authority confirmed the demand of service tax of Rs. 1,24,37,902/- along with interest and penalty, under the category of "Supply of tangible goods" under Section 66 of the Finance Act, 1994, for the period from May, 2008 to January, 2013.

Appellant Contentions:- The Ld. Advocate on behalf of the applicant submits that the adjudicating authority admitted the fact that the control over the goods to the extent of maintenance and smooth functioning of the aircrafts during the lease period was with the applicant. The Ld. Advocate drew the attention of the Bench various clauses of the lease agreement to establish that the effective control of the property is with the applicant. He also drew the attention of the Bench Board's Circular No. Dy. No. 20/Comm. (ST)/2009 dated 02.09.2009, wherein the issue on levy of service tax exclusively on chartering of Aircrafts has been clarified. He strongly relied upon the stay order of the Tribunal in the case of Blue Dart Aviation Ltd. Vs. CST, Chennai - 2012 (28) STR 386 (Tri.- Chen.) and 2013 (30) STR 429 (Tri.-Chen.). He also submits that they have provided the crew and maintenance, insurance etc.

Respondent Contentions:- On the other hand, the Ld. AR on behalf of the Revenue submits that it is an operational lease and therefore, no effective control is with the applicant. It is only the operative control over the applicant. He also submits that the applicant caters maintenance except the changing of the engine without the consent of the owner.

Reasoning of Judgement:- After hearing both the sides and on perusal of the records, we find from the agreement that Clause 27 (b) provides the lessee (applicant) certifies that lessee is responsible for operational control of the aircraft under this lease during the term hereof. Lessee further certifies that lessee understands its responsibility for compliance with applicable Federal Aviation Regulations. Prima facie, it is noted that the maintenance of the aircraft lies with the applicant except change of engine as contended by the Ld. AR. The definition of supply of tangible goods provides that to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use without transferring right of possession and effective control of such machinery, equipment and appliances. The adjudicating authority observed that the applicant had availed aircraft on lease basis only without any legal possession. Prima facie, we find that the applicant acquired the aircraft on the basis of the lease agreement, which is the legal possession.

It is seen that on the identical issue, the Tribunal in the case of Blue Dart Aviation Ltd. (supra), granted unconditional stay. The Ld. AR strongly emphasis that Clause 14(II) of the agreement, which provides that the owner may enter into the premises where the aircraft is located and take possession of and remove the aircraft with or without notice to the lessee, and with or without legal proceedings, all without liability of owner to lessee. We find that Clause 14 of the agreement would be invoked in the event of default, that the right accrues with the owner. On the other hand the Ld. AR also contended that the maintenance is also on the applicant except replacement of the engine. The Commissioner has also accepted that the maintenance is provided by the applicant. The adjudicating authority emphasized that there is no sale in this case. We find that this issue is clearly dealt by the Tribunal in the case of Blue Dart Aviation (supra), which is reproduced below:-

"7. It also stands argued by the learned Senior Advocate that such type of transfer or right to use the aircraft for any purpose is to be considered as "deemed sale" in view of Article 366(29A) of the Constitution of India, 1950, which was introduced by way of 46th Amendment to the Constitution. For better appreciation of the same, we reproduce the relevant portion of the said Article as under:-
"tax on the sale or purchase of goods" includes –

(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(c) a tax on delivery of goods on hire - purchase or any system of payment by instalments;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;"

In terms of sub-clause (d) of the said Article, tax on the sale or purchase of goods included a tax on transfer or right to use any goods for any purpose for cash. The fact that the same is for specified period will not alter the status of the deal. Ld. senior advocate clarifies that in terms of the said provision, the deal between the appellants and M/s. EAT is required to be treated as "deemed sale" so as to be covered by the provisions of sales tax. However, on being questioned, he clarifies that no sales tax is being paid on the said deal, on account of import of the aircraft, which is covered by exemption in terms of provisions of Section 5 of the General Sales Tax Act, 1956. Nevertheless, he submits that inasmuch as the deal is required to be considered as 'deemed sale' and the sales tax and service tax being mutually exclusive to each other, the confirmation of service tax against the appellants is not justified.

In view of the said argument of the learned senior advocate also, we find that the appellants has a good prima facie case in its favour.

Ld. JCDR, Shri V.V. Hariharan appearing for the Revenue accepts that in view of prima facie nature of the matter, as clarified in the above reproduced clarification of the Board, stay may be granted to the applicants.

In view of the above, we dispense with the condition of pre-deposit of service tax confirmed against the applicants and penalties imposed upon them. Stay petition is allowed unconditionally.

In view of the above discussion, we waive the pre-deposit of entire tax along with interest and penalty till the disposal of the appeal.

Decision:- Stay granted.
Comment:-The gist of this case is that when a transaction is treated as “deemed sales” and sales tax is leviable on the same, no service tax can be levied on the same transaction because sales tax and service tax are mutually exclusive taxes. The stay application was allowed by following the ratio of decision given in the case of Blue Dart Aviation Ltd.

Prepared By:Meet Jain

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PJ/CASE LAW/2014-15/2521

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