CESTAT Kolkata Quashes ₹2.10 Crore Service Tax Demand On Equipment Rentals After Finding Transfer Of Control

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Kolkata, has held that an earthmoving equipment manufacturer and lessor was not liable to pay service tax on equipment rental transactions.

The Tribunal held that possession and effective control of the equipment had been transferred to customers and that VAT had been paid on the transactions.

The ruling was delivered by a Bench of Judicial Member Ashok Jindal and Technical Member K. Anpazhakan while allowing the appeal filed by TIL Ltd. The appeal challenged an order confirming a service tax demand of ₹2.10 crore and an equal penalty.

“Admittedly, in this case, the appellant has transfer of right to possession and transfer of effective control to their customers and paid VAT thereon,” the Tribunal observed.

“In that circumstances, the appellant is not liable to pay service tax,” it held.

TIL Ltd. is engaged in the business of manufacturing and trading various equipment, including earthmoving equipment. It also enters into agreements with customers for renting such equipment for specified periods.

According to the Tribunal, the company deploys equipment at customers' sites for specified periods. During that period, responsibility for the equipment entirely and exclusively rests with the customer.

The agreements provide that the equipment remains under the possession, control and custody of the customer during the tenure of the agreement. Ownership of the equipment, however, remains with TIL Ltd.

The Tribunal noted that the agreements place the equipment at the sole risk of the customer. The customer is also required to indemnify the company against losses, damages or destruction of the equipment.

The Tribunal further noted that once the equipment is delivered to the customer's site, the company cannot use it for any other purpose. Nor can it withdraw the equipment during the contractual period.

The company treated the transactions as deemed sales involving transfer of the right to use goods. It paid applicable VAT/CST on the transactions.

The company maintained that the transactions amounted to deemed sales involving transfer of the right to use goods. It had paid VAT/CST on those transactions and placed on record a chartered accountant's certificate confirming the payments.

The tax department took a different view. It argued that renting out the equipment was taxable as a service because possession and effective control had remained with the company.

While considering the dispute, the Tribunal examined the terms of the rental agreements. It also referred to the Supreme Court's ruling in Bharat Sanchar Nigam Limited v. Union of India on what constitutes a transfer of the right to use goods

It noted that the equipment remained under the customer's possession, control and custody during the tenure of the agreement. It also noted that the company was barred from using the equipment elsewhere or withdrawing it after delivery to the customer.

The bench referred to its earlier decision in Gainwell Commosales. In that case, similar arrangements were held to involve transfer of the right to use goods and therefore constituted deemed sales liable to VAT rather than service tax.

The Revenue placed reliance on the Supreme Court's decision in K.P. Mozika v. Oil and Natural Gas Corporation Ltd. The Tribunal held that the ruling was distinguishable and did not apply to the facts of the present case.

The Tribunal observed that in K.P. Mozika, the contractor fully controlled the trailers during the contract period. The right to use the trailers had not been transferred to ONGC.

According to the tribunal, the facts before it were different. In the present case, possession and effective control of the equipment had been transferred to customers.

Consequently, the tribunal set aside the service tax demand. It allowed the appeal with consequential relief.

For Appellant: Advocate.Payel Bharwani,

For Respondent: P Das, Authorised Representative