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1. Introduction :
In most of the States, VAT (commonly known as Lease Tax) is
charged on the amount received by the supplier, permitting right to use the
goods where the possession and control is transferred to the user. However in
many cases, more particularly where machinery or equipment is of a highly
technical nature and operation of the same requires special skills and
experience, possession and effective control of such machinery or equipment is
not transferred to the user. Such transactions do not attract sales tax/VAT.
Under service tax, generally transactions of hire/lease of
moveable assets hitherto did not constitute taxable service under the Finance
Act, 1994 (Act). (However, transactions in the nature of financial lease, were
being taxed under Banking & Other Finance Services category.)
Hence, transactions of hire/lease of movables, wherein
effective control and possession of such goods is not transferred by the
supplier to the user, there was no liability to VAT as well as service tax.
2. Position under VAT/Sales Tax :
Before analysing the newly introduced services category of
“supply of tangible goods for use”, it is felt that, understanding of the
conceptual aspects as to the existing levy of lease tax under sales tax/VAT is
essential. The same are explained hereafter briefly.
(a) Transfer of Right to Use :
As per Article 366(29A)(d) of the Constitution of India,
‘sale’ includes a transfer of right to use any goods for any purpose (whether or
not for a specified period) for cash, deferred payment or other valuable
consideration.
Definition on similar lines has been adopted in S. 2(g)(iv)
of Central Sales Tax Act, 1956 and many State VAT legislations.
(b) ‘Transfer’ implies exclusive possession to transferee :
In a Supreme Court ruling having far-reaching implications
viz. Bharat Sanchar Nigam Ltd. V. UOI, (2006) 146 STC 91 (SC 3-Member
Bench), the following important observations have been made by the Apex Court :
Para 97 :
“To constitute
a transaction for the transfer of the right to use the goods, the transaction
must have the following attributes :
(a) there
must be goods available for delivery;
(b) there
must be a consensus ad idem as to the identity of goods
© the
transferee should have a legal right to use the goods — consequently all legal
consequences of such use including any permissions or licences required
therefor should be available to transferee
(d) for the
period during which the transferee has such legal right, it has to be to the
exclusion to the transferor — this is the necessary concomitant of the plain
language of the statute viz. a ‘transfer of the right to use’ and not
merely a licence to use the goods.
(e) having
transferred, the owner cannot again transfer the same right to others.”
Relying on the
BSNL case stated above, the Gauhati High Court in the case of HLS Asia Ltd.
V. State of Assam, (2007) 8 VST 314 has held that the delivery of physical
possession of goods is not essential precondition for levy of sales tax. The
relevant observations in paras 26 and 27 are as under :
“The
equipment, plants and machinery were available and identified by the parties.
Under the contract, OIL derived the legal right to use the goods having hired
the same on payment of charges. Customs duty had also been paid by it on the
equipment imported by the contractor for executing the works. Under the
stringent contractual terms, the contractor was bound to keep the equipment
engaged exclusively for the works. The fact that the same had been operated by
its technically qualified personnel does not militate against the element of
exclusiveness in the use thereof for the services and benefit of OIL. During
the subsistence of the contract, the appellant-company was neither authorised
nor permitted to transfer the equipment or detain the same for others. The
parties consciously limited the tax liability to the rental component only.
The
provisions of the contract understandably have to be construed in the context
of the service accorded to be rendered. The transfer of right to use the
equipments has to be perceived in the context of the nature, manner and extent
of engagement thereof. The retention of physical possession thereof by the
appellant company cannot be decisive. The parties entered into the contract
understanding the implications of each and every provision thereof, which
according to us, demonstrate an obvious dominion and control of OIL over the
equipment used by the appellant for the execution of the works during the
period of the contract. We, thus, have no hesitation to hold that the
transaction in question involved transfer of right to use the equipment,
plants and machinery under the lease within the meaning of S. 2(33)(iv) of the
Act.”
©
‘Transfer’ is different from ‘allowed to use’ or ‘permitted to use’ :
‘Transfer’ in
the context of Lease Tax implies exclusiveness to the user. For example, if a
passenger boards a bus, can it be said that the bus owner has ‘transferred’
right to use the bus to the passenger ? Obviously the answer is No. The bus
owner has only ‘allowed’ or ‘permitted’ the use of the bus to the passenger on a
non-exclusive basis.
(d) Lease tax is attracted only on ‘goods’ and not on
immovable property :
Lease is taxable only if it is in respect of goods (viz. movable property). Tax cannot be levied if plant and machinery fixed in building is leased, as it is immovable property and not ‘goods’ – Reference can be made to Karthik Engineering Works v. State of Kamataka, (2000) 119 STC 88 (Karn HC DB) – same view in CTO v. Sadulshshar Krai Vikrai Sahakari Samiti, (2004) 135 STC 90 (Raj HC).
In CST v. Bombay Sound Service, (1999) 112 STC 290 (Born HC DB), it was held that hire of recording studio with instruments embedded to earth is not transfer of right to use ‘goods’ as it is not movable property. Similarly in CST v. Pralhad Industries, (1999) 112 STC 548 (All HC), it was held that lease of factory along with plant and machinery fastened to earth is not transfer of ‘goods’, as plant and machinery is immovable property. Reference can also be made to DCST v. Bobby Rubber Industries, (1998) 108 STC 410 (Ker HC DB).
However, in such cases, there could be liability to service tax under ‘Renting of Immovable Property’ services category, subject to satisfaction of taxability criteria specified therein.
e) When is hire of goods taxable under sales tax/ VAT? :
It is commonly found that goods (e.g., furniture, utensils, machinery, equipments, etc.) are given on hire. These are returned after prescribed period and hire charges are paid by the user. This is ‘transfer of right to use for consideration’ and can be treated as ‘sale’ within extended definition of ‘sale’.
In Rashtriya Ispat Nigam v. CTO, (1990) 77 STC 182 (AP HC DB), [confirmed by the Supreme Court in 126 STC 114 (SC)], it was held that hire charges are taxable only when full possession and control is given to the hirer. If the owner (person giving equipment) retains effective control over the equipment, it is not ‘transfer of right to use’. In this case, the assessee had given sophisticated machinery to the contractors for execution of work entrusted to them. However, the machinery continued to be in possession of assessee. The contractor was not free to use the machinery for other work, and hence there is no ‘transfer of right to use’.
The principle enunciated above is popularly referred to as ‘concept of effective control and ownership’.
Some judicial rulings are given hereafter for reference:
- In New Central Group Engg. v. ACCT, (2001) 124 STC 637 (WBTT), a dealer provided machines (dumpers, loaders and cranes) with his men and machines to carry out specified work. It was held that it is not a ‘transfer of right to use goods’ [same view in case of excavators given on hire in Alpha Clays v. State of Kerala, (2004)135 STC 107 (Ker HC DB)].
- In Great Eastern Shipping v. State of Karnataka, (2004) 136 STC 519 (Karn HC DB), a dealer supplied tug (towing vessel) on hire to port trust under Charter Party Agreement. Agreement provided for handing over possession and control in all respect of the tug to the port trust. It was held that this is agreement to transfer right to use the tug. It was also held that since the tugs were within territorial waters, it is a sale within the State, as powers of the State Government extend to the territorial waters adjacent to the State.
- In Lakshmi Audio Visual Inc. v. ACCT, (2001) 124 STC 426 (Kar HC), the petitioner was providing audio visual and multimedia equipment to customers for specified period and collecting hire charges. He was taking equipment to site, installing, operating, dismantling and bringing it back. Possession and effective control always remained with petitioner. It was held that it is not ‘deemed sale’ as customer never got right to use the equipment.
3. Effective date of levy :
The new levy of ‘Supply of Tangible Goods for Use’ has been notified w.e.f. 16-5-2008 and hence would apply to transactions for the period on or after 16-5-2008.
4. Scope of the levy :
The scope of the new levy has been explained vide Ministry’s Circular D.O.F. No. 334/1/2008 – TRU, dated 29-2-2008, as under:
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 66(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., off-shore 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 fact and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether or not VAT payable or paid.”
5. Essential criteria for taxability:
S. 65(105)(zzzzj) of the Act defines taxable service as under:
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 right of possession and effective control of such machinery, equipment and appliances.
The essential criteria for taxability can be summarised as under:
- The service provider can be any person
- The service receiver can be any other person
- The service must be in relation to supply of goods
- The goods so supplied must be tangible goods
- The supply of tangible goods must be for use
- The supply of tangible goods must be without transferring right of possession and effective control of those goods.
6. Specific tax exemption for goods carriage to Goods Transport Agency (GTA) :
Representations were made to the Govt. by the All India Confederation of Goods Vehicle Owners’ Association and also the All India Motor Transport Congress requesting to provide relief on account of levy of service tax on supply of goods carriage to GTA for use in transport of goods. It stated that GTAs often provide services in relation to transportation of goods by road using the goods carriage obtained on rent or hire basis. The relief was sought on various grounds inter alia that the service tax paid on renting/hiring of goods carriage, without right of possession and effective control, could not be taken as input credit for payment of service tax towards GTA service.
Service tax for the GTA service provided is payable only on 25% of the amount charged for providing the GTA service tax. In view of this provision, GTAs are not entitled to take input credit under Cenvat Credit Scheme on goods and services used for GTA service. Moreover service tax for GTA services provided in seven specified cases is not required to be paid by the GTA service provider but by the person making payment towards the freight. Services provided in relation to supply of tangible goods for use, without transfer of possession and effective control, has been made as separate taxable service w.e.f. 16-5-2008. Consequently, supply of goods carriage to the GTA, without transfer of possession and effective control, for using the said goods carriage for transport of goods by road had become leviable to service tax.
The Central Government has issued Notification No. 29/08 ST, dated 26-6-2008 to exempt fully from levy of service tax the supply of transport vehicles (goods carriage) to GTA to be used for transport of goods by road.
The exemption granted is in line with the intention of the Govt. as stated in the Union Finance Minister’s Budget Speech on 8-7-2004 while introducing service tax on GTA, that truck owners would not be subjected to service tax.
7. Some issues:
7.1 X is engaged in the business of giving equipments on hire for a specific period of time, wherein the said goods would effectively remain in the custody and control of the user. X has not been registered under VAT and accordingly is not charging VAT.X has now registered himself with Service Tax Dept. under the new category ‘Supply of Tangible Goods for Use’. Can the sales tax authorities demand and recover VAT from X ?
7.1A Comments:
The intention of the Govt. behind introduction of the new levy has been. very clear to tax those cases of hire/lease, which were escaping sales tax/VAT liability. Under the facts of X, it appears that since effective control and possession of equipments is transferred to the users, it would be liable to sales tax/VAT and not service tax. The mere fact that X has decided to pay service tax, though there was no liability for the same, cannot absolve X from discharging liability to sales tax/VAT. Hence Sales Tax authorities can demand sales tax/VAT from X for the past period as well as for the period during which X has paid service tax.
7.2 Y, a partnership company, is engaged in the business of giving cranes on hire to foreign companies, whereby effective control and possession re-mains with Y through their technical and operating staff. Hence there was no sales tax/VAT liability on hire transactions. Y has entered into an annual contract in March 2008 with a foreign company for hire of cranes during the period 1-4-2008 to 31-3-2009. The entire annual hire of Rs.90 lakh has been received by Y before 31-3-2008. Whether Y would be liable to service tax for the period 16-5-2008 to 31-3-2009. If yes, whether Rs.10-lakh exemption can be availed of by them and what would be the time within which service tax liability is to be discharged by Y?
7.2A Comments:
Though service tax payment to the Government is linked to receipt of consideration for services (either actual or advance), taxable event for levy of service tax, is ‘provision of service’ and not receipt of consideration’. Hence, it would reasonably appear that, Y would be liable to service tax on hire charges attributable to the period 16-5-2008 to 31-3-2009.
This position is impliedly made clear under Rule 6(1) of Service Tax Rules, relevant extract of which is reproduced hereafter:
Rule 6(1) – Payment of Service Tax
The service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the calendar month in which the payment is received, towards the value of taxable services :
Provided that where the assessee is an individual or proprietary firm or partnership firm, the service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the quarter in which the payments are received, towards the value of taxable services:
Provided further that notwithstanding the time of receipt of payment towards the value of services, no service tax shall be payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable:
Provided also that the service tax on the value of taxable service received during the month of March, or the quarter ending in March, as the case may be, shall be paid to the credit of the Central Government by the 31st day of March of the calendar year.
Explanation – For the removal of doubt it is hereby clarified that in case the value of taxable service is received before providing the said service, service tax shall be paid on the value of service attributable to the relevant month, or quarter, as the case may be.
It is felt that if conditions under ten-lakh Exemption Notification are satisfied, one can avail exemption up to ten lakh for the period 16-5-2008to 31-3-2009.
Service tax liability for the entire period (16-5-2008 to 31-3-2009) would have to be discharged by 5th July 2008.
7.3 Z is in the business of giving specialised machines on hire, wherein effective control and possession remains with Z. During the year ended 31-3-2008, Z has purchased 5 new machines on which substantial amount of Excise Duty has been paid. Can Z avail Cenvat Credit of Excise Duty paid on the said machines and set off the same against service tax to be paid on hire charges on or after 16-5-2008 ?
7.3A Comments:
a) In this connection, attention is invited to CBEC Clarification vide letter F No. 137/120/2008 – Cx 4, dated 24-6-2008,extracts of which, are reproduced hereafter:
1. “M/ s. Hindustan Construction Company (HCCL) imported an aircraft last year, which was cleared on payment of appropriate customs duty (i.e., CVD). After its import, the aircraft was being let out by HCCL on hire basis without transferring right of possession and effective control. From 16-5-2008, ‘supply of tangible goods for use, without transferring right of possession and effective control’ is brought under taxable service. After 16-5-2008, such activity attracts service tax on the hire charges received by HCCL. In this regard, it has been requested that HCCL should be allowed to take credit of the CVD paid on the aircraft and utilise it for paying service tax. The modality suggested is to amend the Cenvat Credit Rules, 2004 so as to specifically include aircraft within the definition of capital goods, as has been done in case of motor vehicles for providing specified services.
The matter has been examined. It is noticed that in this specific case, the aircraft was imported last year and till 15-5-2008,the service provided by HCCL was outside the scope of the S. 66 of the Finance Act and thus was covered under the definition of the term ‘exempted services’ under the Cenvat Credit Rules, 2004. As per Rule 6(4),no Cenvat Credit can be taken on capital goods, which are used in providing only exempted services. Therefore, ab initio, HCCL was not eligible to take credit of CVD. Such being the case, the credit which was ab initio ineligible, does not become eligible after the service tax is imposed on the service at a later date. It is therefore clarified that no Cenvat credit of the CVD paid on the said aircraft should be taken, even if it is specifically included within the definition of ‘capital goods’.”
The above is self-explanatory.
b) In this regard, attention is also drawn to a Larger Bench ruling in the case of Spenta International Ltd. v. CCE, (2007) 216 ELT 133 (Tri – LB, WZB), wherein it has been held that eligibility to credit is to be determined with reference to the dutiability of the final product as on the date of receipt of capital goods. The ratio of the said ruling would be relevant for service tax as well.
c) In light of (a) and (b) above, it would appear that, if Cenvat Credit is availed by Z upon compliance of stipulated conditions (non-claiming of depreciation, etc.), the same would be disputed by service tax authorities.
