Controversy: whether renting of vehicle & hiring of vehicle different for service tax?

Decision of The Uttarakhand High Court:
Recently,
the Division Bench of the Uttarakhand High Court, dismissed revenue’s
appeal in 2014-TIOL- 2039-HC-UKAND-ST, Commissioner of Customs &
Central Excise vs. Sachin Malhotra & Others, taking a view that
unless control over vehicle is passed to the hirer under the rent-a-cab
scheme, there cannot be a taxable transaction u/s. 65(105)(o) read with
section 65(91) of the Finance Act,1994 – (The Act).

It is also
observed, “Though both rent and hire may in different context, have the
same connotation, in the context of rent-a-cab scheme and hiring, we are
of the view that they signify two different transactions. What the
lawgiver has chosen fit to tax by way of imposition of service tax is
only transaction relating to business of renting of cabs”. While
deciding as above, the Hon. High Court expressly stated “we are unable
to subscribe to the view taken by the Punjab & Haryana High Court
(supra) which is relied on by the learned counsel for the appellant. We
would think that the said Court has not considered the aspects, which we
would think were absolutely relevant in arriving at a conclusion”. The
aspect the Court referred to while concluding as above is section 75 of
the Motor Vehicles Act, 1988 which contains provisions relating to
empowering Central Government to notify a scheme for renting of motor
cabs. The Rent-A-Cab Scheme,1989 has been formed under these provisions
and which contemplates licensing of the operator under such scheme and
other incidental matters. The counsel for the revenue discussing all
relevant issues and rulings on the subject matter also pleaded to the
Court to ignore the provisions of section 75 of the Motor Vehicles Act
yet, probably did not bring to the attention of the Court that when the
service of rent-a-cab scheme operator was introduced for the first time
in the net of service tax with effect from 16/07/1997 the definition of
rent a cab scheme operator read as:

“Rent-a-cab scheme operator
means a person who is the holder of a license under the Rent-a-Cab
Scheme, 1989 formed by the Central Government under the Motor Vehicles
Act, 1988”.

The said definition was substituted by the Finance (No.2) Act, 1998 to read as follows:

Section 65(19) of the Finance Act, 1994 (the Act):
“Rent-a-cab scheme operator means any person engaged in the business of renting of cabs”.

In
turn, taxable service as per section 65(105)(o) of the Act is defined
as “any service provided or to be provided to any person by a rent-a-cab
scheme operator in relation to renting of cab.”

While
considering revenue’s appeal the Hon. High Court in addition to the
P&H High Court’s decision of Kuldeep Singh Gill (supra) also
discussed at length the other two important decisions viz. Secretary
Federation of Bus Operator Association of TN (supra) and L. V.
Sankeshwar Proprietix Vijayanand Travels vs. Superintendent of Central
Excise 2006-TIOL-340-HC-KAR ST in addition to discussing CIT vs. Madan
& Co. (2002) 174 CTR (Madras)-172.

However, according to the
High Court, each one was distinguished or differed with as the facts of
each of them did not help revenue’s case.

In view of this, it is desirable to briefly summarise at least two of these decisions.

In
case of Kuldeep Singh Gill (supra), the assesse provided transport
service to a corporate on contract basis and contended that since they
did not hold any kind of permit including the tourist permit issued
under the Motor Vehicles Act they were not liable for service tax as
rent-a-cab service provider. In addition to this, no other valid ground
was put forth for non-taxability. The court therefore observed that
section 65 of the Finance Act,1994 does not talk of tourist permit
issued under the Motor Vehicles Act, but only talks about user of the
tourist vehicle by tour operator. Merely, because the Motor Vehicles Act
provides for granting tourist permit, it would not automatically mean
that section 65 also contemplates only a tourist permit and not
otherwise. The court observed and followed the judgment in Secretary,
Federation of Bus Operators (supra) “mutatis-mutandis” which clearly
concluded that ‘tourist permit’ is not required to attract provisions of
section 65(52) of the Finance Act”. Therefore, transport service
provided by the Respondent in this case is a taxable service. In turn,
in case of Secretary, Federation of Bus Operators (supra), the Hon.
Madras High Court examined the issue of service tax applicable to tour
operators u/s. 65(52) and rent-a-cab scheme operator u/s. 65(38) of the
Act & dealt with each category separately. As regards, rent-a-cab
service, the court categorically, interalia held as follows:

“We
have already pointed out that the scope of amended provision, which is
as per Section 65(38), has been widened by deleting the requirement of
holding a licence under Rent-a-cab Scheme,1989. Under the amended
provision any person engaged in business of renting of cabs becomes a
rent-a-cab scheme operator.

(53) we have, therefore, no
hesitation in holding that if the petitioners are plying the motor cabs
or maxi cabs and the services are provided by them to any person in
relation to the renting of the cabs, such service becomes a “taxable
service” and therefore, comes within the ambit of Section 66(3) of the
Finance Act.

Decision of the Gujarat High Court:

As opposed to the above, another recently reported de- cision of the Gujarat high Court (although decided on 10/05/2013 as against the above order of 6th august, 2014, of the uttarakhand high Court) in CST vs. Vijay Travels 2014 (36) STR 513 (Guj) again in appeal by the revenue, the hon. Court has held that there is no difference between renting and hiring of vehicle for levy of service tax. In this case, it was contended in assessee’s case that while the assessee provided passenger vehicles like ambassador, Swaraj mazda, 56 Seater luxury buses etc. to a State Government Board on hire and charged for the same on kilometer basis. It was argued that vehicles were not on rent and the activity did not amount to hand- ing over possession of vehicle to a person who wished to rent it and to drive it himself or through his own driver or to keep it at its disposal and regardless the rent would be payable. as against this, in case of hiring, the passengers are carried for a fare and possession of the vehicle remains with the driver and the entire responsibility would be of the car owner. The counsel for assessee also discussed provisions of section 75 of the motor Vehicles act and contended that only licensed persons under the said section are targeted under the tax net whereas transportation service providers were not intended to be taxed by the above provisions. further, distinction was sought to be made by the assessee’s counsel with the madras high Court’s decision in federation of Bus operators (supra) by stressing that the said judgment dealt with the question of tour operators which is a wholly different service from rent-a-cab service and the judgment did not deal with the issue as to what constitutes renting of a motor cab. He further urged that the judgment of the P&h high Court (supra) also did not deal with the said issue and therefore it was not a binding precedent. Summarily, the case of the assessee was that they operated trips to various places where the management continued with themselves and payment was made on kilometer basis and they did not give vehicles to the Board for operating under Board’s management. the ahmedabad tribunal on the basis of these details had held that no service tax was leviable on this. in fact, this very tribunal at a later date also in Shri Gayatri Tourist Bus Service vs. CCE, Vadodara 2013 (29) STR 499 (Tri.-Ahmd) by a majority decision (the matter was  referred  to  the third  member  on  account  of  difference of opinion) has decided in a similar situation that when vehicles are used for transportation of personnel and delegates of client and the assessee is paid on the basis of log book maintained for the purpose, the vehicles are held as not rented to the client.   This is because in case of renting, the driver of property is depossessed and possession passes on to person who has taken it for usage. When the payment is not on a monthly fixed rent but based on usage means that vehicle is not let out on rent and hence service is not taxable as rent-a-cab service. Coming back to the case before the Gujarat high Court, the above factual matrix was examined vis-à-vis the statutory provisions of service tax law including the definition of cab in section 65(20) of the Act which reads as:

“‘Cab’ means –
(i)    motor cab, or
(ii)    a maxi cab, or
(iii)    any motor vehicle constructed or adapted to carry more than twelve passengers excluding the driver for hire or reward”.

Motor cab, maxi cab in turn have been given the mean- ings under the service tax law, as given under the mo- tor Vehicles Act. For the definition of motor vehicle also, the meaning given in the motor Vehicles act was referred to. The issue consequently was therefore to examine who can be said to have been engaged in the business of renting of a cab and whether renting and hiring of vehicle as contended by the assessee is con- templated by the statute to exclude latter category from tax net?

The Court noted that the requirement of having minimum 50 vehicles and a license as required under the rent Cab Scheme 1989 was done away with the substitution of  the definition of rent-a-cab in 1998 and therefore it would amount to artificial requirement of statute if only those persons are taxed who give away their vehicles without retaining  any  control  personally  or  through  driver.  The Court observed that the concept of lease and license was brought about by contending that lease would have insurable interest which is absent in license.

For this  purpose, the Court examined various dictionary meanings of ‘rent’, one of which provides as “A tax or similar charge levied or paid to a person”. Simultaneously, the Court found that the word ‘hire’ means “payment under contract for the use of something” or “a bailment by which the use of thing or the services are contracted for, at a certain price or reward.” On examination, it was observed that both in renting and licensing de facto pos- session of the thing is enjoyed and came to the conclusion “conceptually and essentially if the nature of service provided is the same, natural corollary is that such service is taxed under the taxing statute.” It was also observed that concept of providing transportation service where de jure control remains with the owner of the vehicle and the driver and yet it functions in accordance with the wish and desire of the person hiring it. In the absence of any specific exclusion in the statute of such service from taxing net, a large portion of such services cannot be held to be non-inclusive by any artificial interpretation and therefore escape the liability on the ground that hiring is differ- ent from renting and such distinction does not find favour with the court. This is because there is nothing to read into the taxing statute that only those persons owning the vehicles and providing on rent with exclusive control of the customer only would be charged was held by the hon. high Court while deciding this case, the hon. high Court relied on the P&h high Court decision (supra) as well as heavily relied on the madras high Court decision in Secretary, federation of Bus operators assn. t.n. (supra).

Conclusion:
It is quite evident at this point that the controversy may or may not end soon on the above issue at least for the period prior to the negative list based service taxation. However, yet another significant concept required to b examined is whether or not a contract of renting and/or hiring a motor vehicle for the use of hirer irrespective of duration of usage of the vehicle amount to “transferring of goods by way of hiring, leasing or licensing wherein transfer of right to use such goods occurs and therefore a transaction would be considered one of ‘deemed sale’ under the Vat laws as decided in landmark decision of the andhra Pradesh high Court in M/s. G.S. Lamba & Sons & others vs. State of Andhra Pradesh 2012-TIOL-49-HC-AP-CT, [analysed in november 2012 issue of BCAJ]. In this case, the issue before the court was whether hiring of transit mixers was contract of transportation service or transfer of the right to use goods.under the contracts, the transit mixers were never transferred to hirer/user Grasim as the effective control over running & using, disciplinary control over drivers, obtaining route permits, to maintain & upkeep vehicles in good condition responsibility for damage during transportation etc. as well as registration of vehicles remained vested in petitioner, the claimant of transport service provider. After a very detailed examination and analysis of terms of contract vis-à-vis all relevant statutory provisions  of  Vat/Sales  tax,  Sale  of  Goods act,  along  with article 366 (29a)(d) of the Constitution of india etc. and considering law laid down by various relevant judicial pronouncements including landmark decision of BSNL vs. UOI 2006-TIOL-15-SC-CT-LB, it was held that tax is not levied on delivery of goods used but on the transfer of the right to use property in goods. This is for the fact that all the tests laid down in BSnL decision (supra) are satisfied cumulatively viz. goods are available for delivery, there is consensus ad idem as to the identity of goods, the transferee has a legal right to goods including the use of licenses, permissions etc. available, for the period during the use, the transferee has the legal right to the exclusion of the transferor and lastly the owner/transferor does not have the right to transfer the same right to others during the period the transferee having legal rights to use the goods. Further, this is irrespective of the length of the duration. Thus, it was held to be the case of ‘deemed sale’ involving transfer of right to use goods and not one of transportation service. It may sound like the opening of Pandora’s box but do the facts of hiring/renting a cab not appear analogical to the contract of hiring of transit mixers (along with drivers)? at this point, however it is to be noted that education Guide published by the Government at paras 6.6.1 and 6.6.2 while clarifying scope and coverage of the declared service of transfer of goods by way of hiring, leasing etc. without transferring the right to use goods, after discussing the test laid down by BSNL (supra) has clarified at illustrations 1 and 4 that when a vehicle is given on hire along with driver where the charge is recovered on mileage basis or when all responsibility is of the owner to abide by the laws, the right to use is not transferred as the car owner retains permissions and licenses relating to cab and therefore effective control and possession is not transferred and thus it is a declared service. Readers may ponder over the same depending however on the relevant facts of each case.