Transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods

CASE STUDY

Prepared by:-
CA Vaibhav Bothra &
Praniti Lalwani

Introduction:-
The service tax on the import has many a time been an issue of dispute between the assessee and the Department. This case study also deals with the same. The assessee imported a machine from Germany and made the payment on installment basis. The Department had a misconception that the machine was leased and so demanded service tax from the assessee. Further, it was also contended that it was “supply of tangible goods” and thus service tax was leviable on the same under reverse charge mechanism. In the case under study, this matter was decided upon by the adjudicating authority.

M/S KANSARA MODLER LTD
[OIO NO. JOD-EXCUS-000-COM-0011-14-15-COMMISSIONER DATED 20.03.2015]

Relevant Legal Provisions:
i)             Section 65B(44), 66/66A, 68 and 69 of the Finance Act,
ii)           Section 73, 75, 78 of the Finance Act, 1994.
iii)          Para 6.6 of the Service Tax Education Guide explained the phrase ‘right to use’ which reads as follows:-

6.6 Transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods

6.6.1 What is the meaning and scope of the phrase ‘transfer of right to use such goods’

Transfer of right to use goods is a well recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to use goods. ‘Transfer of right of goods’ involves transfer of possession and effectivecontrol over such goods in terms of the judgment of the Supreme Court in the case of State of Andhra Pradesh vs RashtriyaIspat Nigam Ltd [Judgment dated 6/2/2002 in Civil Appeal no. 31 of 1991]. Transfer of custody along with permission to use or enjoy such goods, per se, does not lead to transfer of possession and effective control. The test laid down by the Supreme Court in the case of Bharat Sanchar Nigam Limited vs Union of India [2006(2)STR161(SC)] to determine whether a transaction involves transfer of right to use goods, which has been followed by the Supreme Court and various High Courts, is as follows:

·         There must be goods available for delivery;
·         There must be a consensus ad idem as to the identity of the goods;
·         The transferee should have legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;
·         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 languageof the statute, viz., a ‘transfer of the right to use’ and not merely a license to use the goods;
·         Having transferred, the owner cannot again transfer the same right to others.

Issue Involved:-
Whether the activity of purchase of machine on installment basis from Germany amounts to the “supply of tangible goods” or not?
Brief Facts:-
The assessee was engaged in the manufacture of Bearing Rollers falling under Chapter 84 of the First Schedule to the Central Excise Tariff Act, 1985 and was also registered under the category of Goods Transport Agency and for the payment of Service tax on taxable service provided to them by suppliers of tangible goods. The assessee imported a machine from Germany and made the payment on installment basis. It appeared to the Department, that the assessee had leased the machine and had been paying lease charges and did not pay service tax under Reverse Charge Mechanism. Further, it was also alleged that the aforesaid activity amounted to “supply of tangible goods” and hence, was liable to service tax. So, the department issued a Show Cause notice demanding service tax, interest and penalty from the assessee for the period August 2013 to March 2015. After noting the
Assessee’s Contentions:- The assessee made following submissions before the adjudicating authority:-

1.            It was submitted that the impugned show cause notice was not at all tenable at the outset as it was issued by making reference of old provisions of service tax laws as were prevalent prior to 01.07.2012. It was submitted that the service tax laws underwent substantial change with effect from 01.07.2012 wherein the concept of negative list has been introduced. As per the negative list tax regime, the old practice of specifying the taxable services has been dispensed with and only those services have been specified which are exempted either by way of negative list or the mega exemption notification no. 25/2012-ST dated 20.06.2012. Accordingly, the impugned show cause notice placing reliance upon the section 65(105) (zzzzj) defining taxable service of ‘supply of tangible goods’ and Circular No. 334/1/20800/-TRU dated 29.02.2008 is not at all tenable and deserves to be quashed. However, even as per the old provisions invoked against them, they are not liable to pay any service tax under the category of ‘supply of tangible goods’ and they made submissions for the same in the succeeding paragraphs.

2.            It was further contended that for levying service tax on any activity, it is necessary that there is provision of service. In this regard, it is pertinent to refer to the provisions of the new charging section 66B as follows:-

There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

Furthermore, section 65B (44) defines ‘service’ as follows:-

“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-

(a)   An activity which constitutes merely,-

(i)    A transfer of title in goodsor immovable property, by way of sale, gift or in any other manner; or
(ii)   Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause 29(A) of article 366 of the Constitution; or
(iii) A transaction in money or actionable claim;

(b) A provision of service by an employee to the employer in the course of or in relation to his employment;

(c)   Fees taken in any court or tribunal established under any law for the time being in force.”

On perusal of the above definition, it was submitted that the exclusion clause of the service excludes transfer of title in goods from its ambit. Consequently, the transaction of import of ‘Grinding Line Machine’ from Germany is a pure transaction of sale and cannot be liable to service tax. As such, the impugned show cause notice proposing service tax demand under the category of ‘Supply of Tangible Goods Service’ is not at all tenable and is liable to be quashed.

3.            Aligning with the above, the assessee submitted in support of their contention, that the transaction with M/s Aschaffenburger Maschinenfabrik Johhann Modler GMBH, Germany was purely in the nature of purchase of ‘Grinding Line Machine’, and in order to substantiate the fact, Purchase order no. 55003/103A dated 31.07.2006 was also submitted. The purchase order clearly mentioned that an order was placed for supply of one complete Grinding Line Machine for manufacturing Ultra Precision Rollers at price of 20,56,400/- Euro. Furthermore, the terms of payment clearly mentioned that 5% advance was to be paid and the remaining amount was to be paid in 64 monthly installments after commencement of production of India. Therefore, merely because payment was made in installments over the period of time, it cannot be considered that they availed the services of ‘supply of tangible goods service’ and were liable to pay service tax under reverse charge mechanism. Moreover, the above capital goods were imported under the 5% EPCG License Scheme and so the said capital goods were imported only on payment of 5% BCD and Customs Cess. The CVD was levied under section 3(1) of the Customs Act in lieu of Excise Duty and SAD was also levied under section 3(5) of the Customs Act, 1962 but since the machine was imported under EPCG license, the said duties were foregone. The fact that CVD and SAD were leviable on the machine imported clearly indicates that the transaction is in the nature of sale and consequently, the same transaction cannot be considered as service so as to levy service tax. It was further submitted that a transaction can be either that of sale or that of service and cannot be treated as both. Consequently, when CVD and SAD is leviable on the product, it substantiates that the transaction is that of sale and not of service so as to levy service tax. Therefore, the allegation that we are required to pay service tax under the category of ‘Supply of tangible goods service’ under reverse charge mechanism is totally erroneous and deserves to be quashed.

4.            The assessee further submitted that the impugned show cause notice placed reliance on the definition of taxable service given under section 65(105)(zzzzj) of the Finance Act, 1994 for ‘supply of tangible goods service’ which reads as follows:-

Taxable service means any service provided or to be provided to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring the right of possession and effective control of such machinery, equipment and appliances.

It was further contended that as per para 4.4.1 of the departmental clarification no. 334/1/2008-TRU dated 29.02.2008, transfer of right to use involves transfer of both possession and control of the goods to the user of the goods. In this context, the provisions of section 66E (f) pertaining to transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods is being listed as declared service was worth noting. It was submitted that the services of hiring, leasing or licensing is treated as service only if there is no transfer of right to use such goods. The meaning of the term ‘right to use goods’ is transfer of possession and control of goods. Moreover, the reason for excluding the transfer of possession and control of goods from the ambit of declared services is that the same is considered as deemed sales. As per the provisions of Article 266(29A) of the Constitution of India, tax on sale or purchase of goods includes-

(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;

Accordingly, as the transfer of right to use any goods is considered as deemed sales, sales tax is levied on the same and the said activity is excluded from the declared list of services. Hence, in case of any activity to be taxable under the clause (f) of the declared services listed under section 66E, it is necessary that possession and control of goods during the course of leasing is not transferred by lessor to the lessee. However, in this case, the effective possession and control of the grinding line machine is transferred to the assessee as the transaction is that of sale. Consequently, the activity cannot be leviable to service tax as the same is excluded from the section 66E(f) and is being treated as deemed sales as per Article 266(29A) of the Constitution of India. Hence, even if it is accepted for the sake of argument that the transaction is that of lease, then too, no service tax is leviable as there is effective transfer of possession and control of the machinery in our favour. Hence, the impugned show cause notice proposing to raise huge service tax demand is not at all legally tenable and is liable to be quashed.

5.            In support of the assessee’s contention that no service tax is leviable under the category of ‘Supply of Tangible Goods Service’, the assessee wished to place reliance on the decision given in the case of M/S BLUE DART AVIATION LTD. VS COMMISSIONER OF SERVICE TAX, CHENNAI [2013-TIOL-777-CESTAT-MAD] wherein it was held as follows:-

Service Tax Stay/ Dispensation of pre-deposit-Supply of Tangible goods service-Hiring of Aircraft from a foreign company-It is not in dispute that the possession of the aircraft was transferred to the appellant-It is also not in dispute that the aircraft was operated for cargo aviation purposes in India by the appellant. It was handled by the crew appointed by the appellant. Its maintenance and repairs were undertaken by the appellant. On these facts, prima facie, it can be held that appellant was exercising effective control of the aircraft Prima facie case made out against the demand-Pre-deposit waived.

Similar view was taken in the case of M/S TANEJA AEROSPACE AND AVIATION LTD. VS COMMISSIONER OF CENTRAL EXCISE, CHENNAI-III [2015-TIOL-171-CESTAT-MAD] wherein it was held that:-

Service Tax – Stay / dispensation of pre deposit " Supply of tangible goods" – appellant entered into a lease agreement with a foreign company to acquire CESSNA make Aircraft on lease for 10 years on a monthly lease rent basis – same viewed as taxable at appellant's hands by Revenue; demands adjudicated and agitated herein.

Held: Under clause 27 (b) of the lease agreement, lessee is responsible for operational control of the aircraft under this lease during the term hereof; that they understand their responsibility for compliance with applicable Federal Aviation Regulations maintenance of the aircraft lies with the applicant except change of engine applicant had availed aircraft on lease basis only without any legal possession Commissioner has also accepted that the maintenance is provided by the applicant and the adjudicating authority emphasized that there is no sale in this case – on the identical issue, the Tribunal in the case of Blue Dart Aviation Ltd. granted unconditional stay pre deposit waived. [Para 4, 5]

Since in the above case, effective possession and control of the aircraft was with the appellant, it was prima facie held that the transaction is that of deemed sale and not of ‘Supply of tangible goods service”. Therefore, the benefit of the above cited decision should be extended and the proceedings initiated vide the impugned show cause notice should be quashed.

Similarly, reliance is also placed on the decision given in the case of M/S INOX AIR PRODUCTS LTD. VS COMMISSIONER OF CENTRAL EXCISE, RAIGAD [2013-TIOL-1858-CESTAT-MUM] wherein it was held that-

ST applicant importing helium gas in tanks which is to be transported under a controlled temperature customs duty paid on helium gas helium gas is used in the manufacture of other gases tank subsequently re-exported within 6 months demand of ST confirmed on the ground that applicant is receiving storage and warehousing service from foreign service provider and hence liable to pay ST under reverse charge mechanism there is no evidence to show that the supplier of gas has any responsibility in respect of the gas exported in tanks in the factory of the applicant Pre-deposit waived and stay granted: CESTAT [para 6]

ST on rental charges As far as rental charges received from clients in respect of the tanks in which gas is supplied, the applicants are paying Excise duty on the same and, therefore, applicant has made out a strong case in favour Pre-deposit waived and stay granted: CESTAT [para 7]

In the above cited case, it was held that the transaction of import of helium gas in tanks cannot be considered as receipt of storage and warehousing service merely because rental charges were paid for tanks in which gas was supplied. As far as excise duty was paid on the rental charges of tanks in which gas was supplied, prima facie no service tax was payable under the category of storage and warehousing services. By following the same analogy, as far as customs duty, CVD and SAD were paid on the transaction of import of machinery, the question of paying service tax under the category of ‘Supply of tangible goods service’ does not arise at all. Hence, the benefit of the above cited decision should be extended to us and the impugned show cause notice should be set aside.

Similarly, reliance is also placed on the decision given in the case of M/S STATE TRADING CORPORATION OF INDIA LTD. VERSUS COMMISSIONER OF SERVICE TAX, MUMBAI [2013-TIOL-1266-CESTAT-MUMBAI] wherein it was held that-

ST Sale of goods on High Seas Sale basis-markup/ trade margin charged by the appellant to customers is subject to customs duty as part of the transaction value-If that be so, there is no reason why the same part of the transaction value should be taken out of the customs transaction and subjected to Service Tax under the guise of Business Auxiliary Services- Pre-deposit waived & Stay granted: CESTAT [paras 6.1 & 7]

In the above decision it was concluded that there appears to be no reason why the same part of the transaction value should be taken out of the customs transaction and subjected to service tax. In our case also, the transaction of import of machinery is leviable to customs duty but the revenue department is resorting to levy service tax on the same transaction by treating as import of service under the category of supply of tangible goods service which is totally erroneous. Therefore, the impugned show cause notice is not at all tenable and deserves to be set aside.

Similarly, reliance is placed on the decision given in the case of M/S INDIAN OIL CORPORATION LTD. [2012-TIOL-180-CESTAT-MUMBAI] wherein it was held that-

Since Facilitation charges and additional handling charges are included in the assessable value, they are not liable for Service Tax– Prima facie case in favour – Pre-deposit waived and Stay granted: CESTAT [ para 6, 7]

INOX AIR PRODUCTS LTD. VERSUS C.C.E. & S.T., PONDICHERRY [2015 (40) S.T.R. 103 (Tri. – Chennai)] wherein it was held that:-

Stay/Dispensation of pre-deposit - Supply of Tangible Goods services - Vacuum Insulated Transport Tanks - Appellant discharging excise duty on Fixed Facility charges received on maintenance of said goods installed in factory of appellant’s premises - Prima facie, demand of Service Tax on same amount, not sustainable - Stay granted earlier in identical issue of same appellant - Accordingly, stay allowed with complete waiver of pre-deposit - Section 65(105)(zzzzj) of Finance Act, 1994 - Section 35F of Central Excise Act, 1944 as applicable to Service Tax vide Section 83 of Finance Act, 1994. [para 3]
SBEC SUGAR LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, MEERUT-I [2015 (38) S.T.R. 1184 (Tri. - Del.)]wherein it was held that-

Stay/Dispensation of pre-deposit - Supply of Tangible Goods service - Scope of - Boiler given on lease - Statutory provision clearly excludes transfer of right to use tangible goods involving transfer of possession and effective control - Transaction appears clearly outside the purview of supply of tangible goods - Requirement of pre-deposit waived - Section 35F of Central Excise Act, 1944 as applicable to Service Tax vide Section 83 of Finance Act, 1994. [paras 1, 3]
GMMCO LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, NAGPUR [2013 (31) S.T.R. 675 (Tri. – Mumbai)] wherein it was held that:-
Stay/Dispensation of pre-deposit - Deemed sale - Leasing of machinery/equipment - Discharge of VAT liability on consideration received under Section 2(24)(a)(iv) of Maharashtra’s Value Added Tax Act, 2002 under ‘Transfer of right to use’ category - Demand raised under ‘supply of Tangible Goods for use service’ - Revenue’s contention of retention of right of possession and effective control with assessee based on clauses in agreement relating to restriction of use by lessee - HELD : As per agreement’s terms and condition, transaction of transfer of right to use which is deemed sale under impugned Section 2(24) ibid - Finance Minister’s speech and budget instructions clarifying if VAT payable, Service Tax not attracted - Ratio of Andhra Pradesh High Court judgment in G.S. Lamba & Sons applicable - Transaction not ‘supply of Tangible Goods for use service’ - Prima facie, strong case made out in favour of grant of waiver - Section 65(105)(zzzzj) of Finance Act, 1994 - Section 35F of Central Excise Act, 1944 as applicable to Service Tax vide Section 83 of Finance Act, 1994. [paras 5.1, 5.2, 5.3, 5.4, 6]
BLUE DART AVIATION LTD. VERSUS COMMISSIONER OF SERVICE TAX, CHENNAI [2012 (28) S.T.R. 386 (Tri. – Chennai)] wherein it was concluded that:-

Stay/Dispensation of pre-deposit - Aviation Cargo services - ‘Operating Lease Agreement’ for purpose of operating aircraft in India - Payment of lease rent - Entire control and possession including maintenance, repair and running, coverage of insurance etc., assessee’s liability - Therefore, impugned services not covered under ‘supply of tangible goods’ - In view of Board’s clarification recorded in Business Aviation Association For India [2011 (24) S.T.R. 22 (Del.)] assessee able to make out good case - Nevertheless, deal to be considered ‘deemed sale’ and sales tax and Service Tax mutually exclusive to each other, therefore confirmation of tax unjustified - Good prima facie case in assessee’s favour - Condition of pre-deposit waived of - Section 35F of Central Excise Act, 1944 as applicable to Service Tax vide Section 83 of Finance Act, 1994. [paras 5, 6, 7, 8, 10]

IN RE : RITES LTD. [2011 (24) S.T.R. 242 (A.A.R.)] wherein it was held that-

Financial Leasing services - Operating on dry lease of locomotives, coaches and wagons - Advance Ruling - Leasing of equipment for a short period on rent without providing any other service and without having any control over the equipment - Proposed leasing of locomotives coaches/wagons by applicant for a short duration to a lessee on a rent, the term or rent bearing no correlation to either the life of equipment or the cost of equipment, would not be exigible to Service tax under the Finance Act, 1994 on the basis of definition in Section 65(12) of Finance Act, 1994 - Since exclusive possession and effective control of the equipment is to be transferred to the lessee during the term of the lease, Section 65(105)(zzzj) ibid cannot be attracted.[paras 13, 14, 15]

In light of the above cited decisions, it was contended that service tax is not leviable on those transactions have been treated as transaction of sale. Moreover, when it is clear that the possession and effective control of the goods has been transferred, then no service tax can be levied under the category of ‘supply of tangible goods service’. Consequently, the impugned show cause notice that is issued for levying service tax on the transaction of purchase of machinery on installment basis under the category of ‘supply of tangible goods service’ when effective possession and control over the machinery was transferred to the assessee was not at all tenable and was liable to be set aside.

6.                        Aligning with the above, it was further submitted that the phrase ‘right to use’ is explained in            the para 6.6 of the Service Tax Education Guide which reads as follows:-

6.6 Transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods

6.6.1 What is the meaning and scope of the phrase ‘transfer of right to use such goods’

Transfer of right to use goods is a well recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to use goods. ‘Transfer of right of goods’ involves transfer of possession and effectivecontrol over such goods in terms of the judgment of the Supreme Court in the case of State of Andhra Pradesh vs Rashtriya Ispat Nigam Ltd [Judgment dated 6/2/2002 in Civil Appeal no. 31 of 1991]. Transfer of custody along with permission to use or enjoy such goods, per se, does not lead to transfer of possession and effective control. The test laid down by the Supreme Court in the case of Bharat Sanchar Nigam Limited vs Union of India [2006(2)STR161(SC)] to determine whether a transaction involves transfer of right to use goods, which has been followed by the Supreme Court and various High Courts, is as follows:

·         There must be goods available for delivery;
·         There must be a consensus ad idem as to the identity of the goods;
·         The transferee should have legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;
·         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 languageof the statute, viz., a ‘transfer of the right to use’ and not merely a license to use the goods;
·         Having transferred, the owner cannot again transfer the same right to others.

Whether a transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as a whole, to determine the nature of the transaction.

A transaction can be considered as ‘transfer of right to use goods’, there is a requirement to satisfy certain tests as laid down by the Hon’ble Apex Court. It was contended that all the above tests were satisfied in this case as there was machinery available for delivery, there was consensus ad idem as regards identity of goods which was also clear from the purchase order for Grinding Line Machinery. Moreover, the assessee also had legal right to use the goods and the same was clear from the Bill of Entry filed by them for clearance of said goods. Furthermore, the Installation Certificate issued by the Assistant Commissioner, Central Excise Division, Jodhpur confirmed the fact that the said imported machinery was installed in their factory premises and they had exclusive right to use the said imported machine. They submitted that import of machinery in their name itself proved that effective possession and control of the machinery was being transferred to them. As such, no service tax was leviable under the category of ‘Supply of tangible goods service’ as the transaction was covered by the phrase ‘transfer of right to use’ which is excluded from the definition of declared service given under section 66E (f) of the Finance Act, 1994. Therefore, the impugned show cause notice proposing to confirm service tax demand under the category of ‘supply of tangible goods service’ was wholly and totally erroneous and was liable to be quashed.

7.                  It was further submitted that the Grinding line machine imported by the assessee was being treated as capital asset and they also claimed depreciation on the same in their financial statements also and also under the Income Tax Laws. They submitted that depreciation on assets can be claimed under section 32 of the Income Tax Act, 1962 only if the machinery is owned by the assessee and used for the purposes of business or profession. They submitted that as they had claimed depreciation on the Grinding line machine imported by them, it was clear that they were the owner of the said machine. Moreover, the Grinding Line Machine imported by them was considered under the block of Plant and Machinery on which depreciation at the rate of 13.91% was being claimed by them. Consequently, when it was proved that they were the owner of the machine, then the question of availing the service of ‘Supply of tangible goods’ did not arise at all. A copy of the ledger account of New Grinding Line Machine, Depreciation Chart and Annual Report was also enclosed by them in Annexure-1 for your reference. On perusal of the depreciation chart and the amount of depreciation claimed in Schedule 5 pertaining to Fixed Assets on page no. 10, it was crystal clear that they had claimed depreciation on the Grinding Line Machine and they were the owner of the said machine. Hence, they alleged that impugned show cause notice should be vitiated.

8.                  Without prejudice to the above submissions that the entire service tax demand wa not tenable, they also pointed out that the service tax demand was raised on higher side. They submitted that the ledger account on the basis of which the show cause notice has computed service tax demand was provided by them before finalisation of their annual accounts. Consequently, the ledger account on the basis of which service tax demand was raised was not proper as they did not contain the adjustments made in the ledger account. They submitted that the following entries were mistakenly entered in the ledger account submitted by us to the revenue authorities which reflected payment made towards installment of machinery. However, in reality, these entries pertained to advance amount paid for import of tools/dyes. These entries were rectified and were transferred as ‘Tooling Advance’ while finalising the books of accounts. However, the above entries were also considered for raising service tax demand against them on the allegation that these payments were with respect to lease charges paid by them which was factually wrong. The details of entries were as follows:-

Date	Particulars	Voucher Type	Debit	Credit
04.03.2014	To SBBJ EEFC Euro 61024627407	Payment	60,92,208
	To TDS on lease charges	Journal	6,76,912
18.03.2014	To SBBJ EEFC Euro 61024627407	Payment	30,37,407
	To TDS on lease charges	Journal	3,37,490
			1,01,44,017

We submit that as per the final ledger account, the following entries were in place of the above produced entries:-

Date	Particulars	Voucher Type	Debit	Credit
04.03.2014	To SBBJ EEFC Euro 61024627407	Payment	40,50,000
	To TDS on lease charges	Journal	4,50,000
			45,00,000

They submitted that in reality, differential amount of Rs. 56,44,017/- was nothing but ‘tooling advance’ given to the party for import of dyes/ink. As such, even otherwise, the service tax demand should be reduced by Rs. 6,97,601/- (Rs. 56,44,017*12.36%).

9.            They further submitted that when the service tax demand itself was not at all sustainable, the question of paying interest under section 75 of the Finance Act, 1994 does not arise at all. Therefore, the impugned show cause notice proposing to recover interest under section 75 was not at all tenable and deserved to be quashed.

10.                It was further submitted that the service tax demand had been raised by invoking extended period of limitation which was not at all proper in their case. They submitted that the fact that they had imported machinery from Germany was not hidden from the revenue authorities as they were already issued show cause notice having no. as V(ST) Adj-II/JPR-II/52/10/887 dated 22.06.2011 for paying service tax under the category of ‘errection, commissioning and installation’ service on the same transaction of import of Grinding Line Machinery from Germany. They submitted that as there was confusion as regards service tax liability on the import of machinery from Germany, they paid service tax on the amounts paid by them to the seller under the category of ‘Supply of Tangible Goods Service’. However, the revenue department opined that the service tax is payable under the category of ‘errection, commissioning and installation service’ and raised service tax demand on the entire amount paid by them. They further mentioned that the show cause notice was not adjudicated till date and on the contrary, for the same transaction, they had been issued the present show cause notice by invoking extended period of limitation by considering the transaction as leviable to service tax under the category of ‘Supply of Tangible Goods Service’. They submitted that such an act truly reflects that even the revenue department is not sure about the nature of the transaction and its service tax leviability. They submitted that on realising that the transaction is in reality purchase of capital goods on which no service tax is leviable, they discontinued paying service tax on the payments made by them. They submitted that, the present show cause notice was not tenable at the outset on the grounds of limitation itself as the revenue authorities were having in-depth knowledge of the transaction. As such, show cause notice cannot be issued second time on the same issue, that too, after considerable period of time to change the stand taken by the revenue department earlier. Hence, the service tax demand was clearly barred by limitation and deserved to be quashed.

11.          In continuation to the above, they also submitted that a transaction cannot be levied to service tax twice under different categories of service. When service tax demand was already raised against them on this transaction under the category of ‘errection, commissioning and installation service’, then service tax demand cannot be raised on the same transaction by classifying it under ‘Supply of tangible goods service’ as this tantamounts to change in stand of the revenue department which is not permissible. It has been held by hon’ble Supreme Court that once a stand is taken by an authority, it is not allowed to take a differential stand under the same facts and circumstances. It has been held in the case of BIRLA CORPORATION LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE [2005 (186) E.L.T. 266 (S.C.)]. In this case it was held that revenue is not allowed to take a different stand in the two identical situations. The verdicts of hon’ble Supreme Court are produced as follows:-
            “Judicial discipline - Discrimination - When question arising for consideration and facts are almost identical to previous case, revenue cannot be allowed to take a different stand.”
Similar decision was given in the following cases:-
o    JAYASWALS NECO LTD. VERSUS COMMISSIONER OF CENTRAL EXCISE, NAGPUR [2006 (195) E.L.T. 142 (S.C.)]
o    COMMISSIONER OF C. EX., HYDERABAD VERSUS NOVAPAN INDUSTRIES LTD. [2007 (209) E.L.T. 161 (S.C.)]

In light of the above decisions, the contrary stand taken by the revenue department in the same transaction is not at all tenable and deserves to be quashed.
12.          It was further submitted that invocation of extended period of limitation was not justified in their case in the light of decision of hon’ble Supreme Court in the case of Rainbow Industries v/s. CCE [1994 (74) ELT 3 (SC)] wherein it has been held that for invoking the extended period, two ingredients are essential – (i) Wilful suppression, mis-declaration, etc. and (ii) Intention to evade payment of duty. In absence of both of these extended period cannot be invoked. This is also held in the case of Chemphar Drug & Limits reported in (2002-TIOL-266-SC- CX) - [1989 (40) E.L.T. 276 (S.C.)] that extended period of limitation can only be invoked in case of fraud, collusion, suppression or willful misstatement. In absence of these essential ingredients, extended period cannot be invoked. Verdicts of hon’ble Supreme Court held as under:-
“Demand – Central Excise – Limitation –Invoking extended period of five years – something positive other than mere inaction or failure on part of the manufacturer or producer or conscious or deliberate withholding of information when the manufacturer knew otherwise, is required before it is saddled with any liability, before the period of six months.”
Thus, in the light of above decision, extended period cannot be invoked blindly in every case. Where the assessees have been acting in the boundaries of law, the extended period cannot be invoked. Similar decision is given in the following cases:-
Ø PUSHPAM PHARMACEUTICALS COMPANY VS. CCE, MUMBAI ( 2002-TIOL-235-SC- CX )
Ø LARSEN & TOUBRO LTD. Versus COMMISSIONER OF C. EX., PUNE-II [2007 (211) ELT 513(S.C.)]
Ø PADMINI PRODUCTS vs. CCE[1989 (43) ELT 195 (Supreme Court)]

In the above cases, it was held that mere negligence or failure to pay duty on part of assessee is not sufficient to invoke the extended period of limitation. It should be proved that there was suppression of facts with intent to evade payment of service tax. This is not the case here. They had rightfully not paid service tax on the transaction of purchase of imported machinery as there was no import of service and consequently there was no liability to pay service tax under reverse charge mechanism. Thus, the extended period was wrongly invoked in the instant case and the demand was barred by the clause of limitation.
13.          It was also submitted that when there is no malafide intention to evade duty or to suppress facts from the department, penalty is not imposable in view of Supreme Court judgment given in the case of Hindustan Steel Vs. State of Orissa [1978 2 ELT J 159 (Supreme Court)]. In this case it was held that an order imposing penalty for failure to meet statutory obligation is a result of proceedings which are quasi judicial in nature and penalty should not ordinarily be imposed unless the person acted deliberately in defiance of law or was guilty of misconduct or dishonest or acted in conscious disregard of his obligation. In view of Supreme Court judgment, since intention to evade payment of duty is not there, penal provisions cannot be invoked. The show cause notice was thus liable to be dropped.

14.          In continuation to the above, it was further submitted that even the highest court of India – Hon’ble Supreme Court held in the case of COMMISSIONER OF CENTRAL EXCISE, TRICHY VERSUS GRASIM INDUSTRIES LTD. [2005 (183) E.L.T. 123 (S.C.)] that where the act of assessee is based on the interpretation taken by the Tribunal, penalty cannot be imposed as the act is based on bonafide belief. The verdicts of Apex Court are produced as follows:-

“Penalty - Bona fide belief caused by Tribunal’s decision - Tribunal in a number of cases giving an interpretation as understood by assessee - Penalty not imposable - Rule 173Q of erstwhile Central Excise Rules, 1944 - Rule 25 of Central Excise Rules, 2002. [para 20]”
Reasoning adopted by the adjudicating authority:
The learned authority have gone through the Show cause Notice, Case records, reply to the show cause notice, written submission, documents furnished by the assessee as well as the submissions made during course of personal hearing.
The adjudicating authority found that the assessee had submitted a Purchase order which clearly mentioned that an order was placed for supply of one complete Grinding Line Machine for manufacturing ‘Ultra Precision Rollers’ at price of 20,56,400/- Euro. The terms of payment clearly mentioned that 5% advance was to be paid and the remaining amount was to be paid in 64 monthly installments. Hence, merely because payment was made in installments over the period of time, it cannot be considered that there was no purchase or sale or the transaction was that of supply of tangible goods. The basis of the SCN was simply that as per ledger the assessee had paid the installment amount as lease charges, but that cannot refute the fact about a purchase order and that there was a purchase and sale transaction and not a lease transaction. In fact the goods were taken in the internal records of the assessee as owned by them. They had claimed depreciation on that and there was even nothing in purchase order to substantiate that goods were to be ever returned or were on lease.
He further reproduced the section 65E(f), which has described the activity of deemed services.
66E. Declared services-The following shall constitute declared services, namely:-
(a)   Renting of immovable property;
(b) ……
(c)   ….
(d) Transfer of goods by way of hiring, leasing ,licensing or in any such manner without transfer of right to use such goods;
On its clear textual signal, transferring right of possession and effective control of tangible goods(including machinery equipment or appliances), is outside the purview of the taxable service. Such exclusion is also consistent with the constitutional limitation upon the legislative field of Parliament. Post the 46^th amendment to the Constitution and introduction of Article 366(29A)(d), transfer of the right to use goods is ‘deemed sale’, falling withen the purview of the legislative field of a State to tax ’deemed sale’, as sale. The power to tax what is a ‘deemed sale’ as service is thus outside the authorised legislative field of Parliament. To avoid any misconception in execution of the provisions of the Act, Parliament specifically excluded the transactions involving “transfer of the right of use or possession and effective controlof tangible goods” from the purview of service tax, by incorporating the exclusionary clause in section 65(105)(zzzzj). The adjudicating authority also reproduced the extract of relevant Board circular (M.F.(D.R.) Letter D.O.F. No. 334/1/2008-TRU, dt 29-2-2008E, in this regard:
“4.4 Supply of tangible goods for use:
4.4.1 Transfer of the right to use any goods is leviable to sales tax/VAT as deemed sale of goods[Article 366(29A)(d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods.
4.4.2 Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes, etc., offshore construction vessels & barges, geo-technical vessels, tug and barge flotillas, rigs and high value machineries are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service.
4.4.3 Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT/ sales tax as deemed sale of goods, is not covered under the scope of the proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the term of the contract and other material facts. This could be ascertainable from the fact whether or not VAT is payable or paid.”
Further, the CBEC education guide on service tax also clarifies the meaning of the words treansfer of the right to use as following:
“6.6 Transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods

6.6.1 What is the meaning and scope of the phrase ‘transfer of right to use such goods’

Transfer of right to use goods is a well recognized constitutional and legal concept. Every transfer of goods on lease, license or hiring basis does not result in transfer of right to use goods. ‘Transfer of right of goods’ involves transfer of possession and effectivecontrol over such goods in terms of the judgment of the Supreme Court in the case of State of Andhra Pradesh vs RashtriyaIspat Nigam Ltd [Judgment dated 6/2/2002 in Civil Appeal no. 31 of 1991]. Transfer of custody along with permission to use or enjoy such goods, per se, does not lead to transfer of possession and effective control. The test laid down by the Supreme Court in the case of Bharat Sanchar Nigam Limited vs Union of India [2006(2)STR161(SC)] to determine whether a transaction involves transfer of right to use goods, which has been followed by the Supreme Court and various High Courts, is as follows:

·         There must be goods available for delivery;
·         There must be a consensus ad idem as to the identity of the goods;
·         The transferee should have legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;
·         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 languageof the statute, viz., a ‘transfer of the right to use’ and not merely a license to use the goods;
·         Having transferred, the owner cannot again transfer the same right to others.

Whether a transaction amounts to transfer of right or not cannot be determined with reference to a particular word or clause in the agreement. The agreement has to be read as a whole, to determine the nature of the transaction.

There is nothing in the SCN to substantiate the case that there was no transfer of right to use and possession. In fact the goods were taken as owned by the assessee and there is nothing in the purchase order to substantiate that goods were to be ever returned or were on lease.
In view of the above, proceedings which were initiated were dropped.

Decision:-Show cause notice dropped.
Conclusion:-The adjudicating authority held thatthe service tax is payable only when the machine, equipment and appliances are supplied with no legal right of use or possession or effective control. If the goods are transferred with the legal right to use then it is a deemed sale. In the above case, the Department was under the misconception that the machine was leased and was liable to service tax. The Department also imposed interest and penalty on the same. But, since the assessee had purchased the machine on installment basis, there was transfer of possession and effective control. It was held that the above activity did not amount to “supply of tangible goods” and thus service tax, interest and penalty were set aside.

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PJ/Case Study/2016-17/113
28 January 2017

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PJ/Case Study/2016-17/113 28 January 2017

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PJ/Case Study/2016-17/113
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