The Customs, Excise & Service Tax Appellate Tribunal, Kolkata Regional Bench, has clarified a long-standing ambiguity in indirect tax jurisprudence by holding that the transfer of possession and effective control of equipment to customers transforms a rental transaction into a deemed sale under VAT/CST, thereby excluding it from the scope of service tax. This decision reinforces the principle that tax classification must follow the substance of the transaction, not its form.
Background & Facts
The Dispute
The appellant, M/s TIL Ltd., is engaged in the manufacturing and trading of earthmoving equipment. In addition to sales, it enters into rental agreements with customers for the temporary use of such equipment. Under these agreements, the equipment is delivered to the customer’s site, where the customer assumes full operational control, custody, and risk during the rental period. The appellant retains legal ownership but relinquishes all practical control. The Department of Service Tax assessed the appellant for service tax under Section 65(105)(zzzzj) of the Finance Act, 1994, treating these rentals as taxable services, despite the appellant having paid VAT/CST on the same transactions as deemed sales.
Key Facts
- The appellant entered into rental agreements with customers, including BSC-C&C JV, from April 2008 to March 2013.
- Key contractual terms included:
- The equipment was under the exclusive possession, control, and custody of the customer during the rental period (Clause 2.2).
- The customer bore all risks of loss, damage, or destruction (Clause 7.1).
- The customer could appoint its own operators (Clause 4.4), and was liable for any accidents arising from misuse.
- The appellant could not use or withdraw the equipment during the term (Clause 2.7).
- The appellant was not responsible for operational liabilities; indemnity clauses placed all liability on the customer (Clause 8.1).
- The appellant issued invoices charging VAT/CST and treated the transactions as deemed sales under the West Bengal VAT Act, 2003 and Central Sales Tax Act, 1956.
- A Chartered Accountant’s certificate confirmed payment of VAT/CST on these transactions.
- The Department issued a show-cause notice on 24.10.2013, demanding service tax of Rs. 2,10,17,326/- for the period April 2008 to March 2013, along with an equal penalty under Section 78 of the Finance Act, 1994.
- The Commissioner confirmed the demand in an order dated 19.10.2017, rejecting the appellant’s contention that the transaction was a deemed sale.
Procedural History
- 24.10.2013: Show-cause notice issued for the period April 2008 to March 2013.
- 19.10.2017: Order-in-Original passed by Commissioner of CGST & Central Excise, Kolkata, confirming service tax demand of Rs. 2,10,17,326/- and penalty of equal amount.
- 21.05.2026: Hearing before CESTAT Kolkata.
- 17.06.2026: Final Order pronounced by CESTAT Kolkata.
The Parties' Positions
For the Appellant
- Argued that the transaction constituted a transfer of the right to use goods under Article 366(29A)(d) of the Constitution, qualifying as a deemed sale under VAT/CST.
- Relied on the five-fold test laid down in Bharat Sanchar Nigam Limited v. Union of India to demonstrate fulfillment of all attributes: availability of goods, consensus on identity, legal right to use, exclusion of transferor’s control, and non-transferability of rights during the period.
- Cited multiple precedents including Gainwell Commosales v. Commissioner of ST, Oil India Ltd. v. CC & CE, Computer Exchange Pvt. Ltd. v. Commissioner of ST, and Inox Air Products Pvt. Ltd. v. CCE & CGST.
- Contended that service tax and VAT are mutually exclusive, and payment of VAT precludes service tax liability.
- Argued that the provision under Section 65(105)(zzzzj) was repealed with effect from 01.07.2012 under the negative list regime, rendering the demand for the period July 2012 to March 2013 legally unsustainable.
- Asserted that the extended period of limitation (April 2008 to September 2011) was wrongly invoked, as the appellant acted in bonafide belief that no service tax was payable.
For the Respondent
- Relied on K.P. Mozika v. Oil and Natural Gas Corporation Ltd. to argue that the appellant retained effective control due to maintenance obligations and operator deployment.
- Contended that the contractual terms did not amount to a transfer of control, as the appellant retained inspection rights and provided operators.
- Maintained that the transaction fell squarely within the definition of "supply of tangible goods service" under Section 65(105)(zzzzj).
Relief Sought
The appellant sought:
- Setting aside of the impugned order dated 19.10.2017.
- Cancellation of service tax demand of Rs. 2,10,17,326/- and penalty of equal amount.
- Declaration that the transaction was a deemed sale under VAT/CST and not subject to service tax.
- Relief on grounds of non-applicability of Section 65(105)(zzzzj) post 01.07.2012.
- Cancellation of demand for the extended period (April 2008 to September 2011) on grounds of bonafide belief.
The Legal Issue
The central question was whether the rental of earthmoving equipment, where possession and effective control are fully transferred to the customer, constitutes a "supply of tangible goods service" under Section 65(105)(zzzzj) of the Finance Act, 1994, or whether it qualifies as a "transfer of right to use goods" attracting VAT/CST as a deemed sale.
Arguments Presented
For the Appellant
The appellant relied on the five attributes established in Bharat Sanchar Nigam Limited v. Union of India to demonstrate that the transaction met all criteria of a deemed sale: (1) goods were delivered; (2) identity of equipment was specified in schedules; (3) customers had legal right to use the equipment, including the option to appoint operators; (4) control and custody were exclusively with the customer, with the appellant unable to use or withdraw the equipment; and (5) the rights could not be re-transferred during the rental period. The appellant cited Gainwell Commosales, Computer Exchange, and Inox Air Products to show consistent tribunal precedent favoring VAT over service tax in such cases. It further argued that Circular No. 334/1/2008 and UOI v. Arviva Industries bind the department to recognize VAT payment as conclusive evidence of exclusion from service tax. The appellant also contended that the provision under Section 65(105)(zzzzj) was repealed with effect from 01.07.2012, making the demand for the period July 2012 to March 2013 legally void. Finally, it argued that the extended period of limitation could not be invoked due to bonafide belief, citing Amit Metaliks and Carzonrent.
For the Respondent
The respondent relied on K.P. Mozika v. ONGC, arguing that the appellant retained control through maintenance obligations and operator deployment. It contended that the right to inspect and the provision of operators indicated that the appellant retained effective control, thus falling outside the definition of deemed sale. The respondent did not dispute the payment of VAT but argued that VAT payment did not automatically exclude service tax liability.
The Court's Analysis
The Tribunal undertook a detailed examination of the contractual terms and applied the five-fold test from Bharat Sanchar Nigam Limited v. Union of India. It found that all five attributes were unequivocally satisfied. The equipment was delivered, identified by serial numbers in Schedule A, and used exclusively by the customer under its own supervision. The customer bore all operational risks and liabilities, including those arising from accidents involving operators provided by the appellant. Crucially, Clause 2.7 prohibited the appellant from using or withdrawing the equipment during the term, confirming the exclusivity of the customer’s control.
"The equipment shall be under the possession, control and custody of the Customer during the tenure of the Agreement for use by them for the purpose for which the equipment is manufactured."
The Tribunal distinguished K.P. Mozika, noting that in that case, the contractor retained operational control and provided all manpower, whereas here, the customer had the right to operate the equipment and was liable for all consequences. The Tribunal further held that the appellant’s right to inspect the equipment did not negate the transfer of control, citing Anandcine Services Pvt. Ltd. v. Commissioner of Service Tax, which recognized inspection rights as consistent with transferred possession.
The Tribunal also rejected the argument that maintenance obligations retained control, relying on Express Engineers & Spares v. Commissioner, CGST, which held that post-delivery maintenance does not alter the nature of the transaction. Similarly, the provision of operators under customer supervision was held insufficient to negate the transfer of control, citing Petronet LNG Ltd. v. Commissioner of Service Tax.
The Tribunal affirmed that service tax and VAT are mutually exclusive, citing Imagic Creative Pvt. Ltd. v. Commissioner of Central Taxes and Oil India Ltd., and emphasized that Circular No. 334/1/2008, which states that VAT payment indicates the transaction is outside the scope of service tax, is binding on the department under UOI v. Arviva Industries.
Regarding the period from July 2012 to March 2013, the Tribunal held that Section 65(105)(zzzzj) was repealed with the advent of the negative list regime on 01.07.2012, and therefore, any demand based on this provision for that period was legally unsustainable, relying on Commr. of CGST, Delhi East v. Sanjay Electricals.
Finally, the Tribunal accepted the appellant’s bonafide belief argument for the extended period (April 2008 to September 2011), noting that the legal position on deemed sales was well-established in multiple tribunal decisions, and the appellant had consistently paid VAT, demonstrating no intent to evade tax.
The Verdict
The appeal was allowed. The Tribunal set aside the impugned order dated 19.10.2017, cancelled the service tax demand of Rs. 2,10,17,326/- and the penalty of equal amount, and held that the rental transactions constituted deemed sales under VAT/CST. The demand for the period from 01.07.2012 to 31.03.2013 was held unsustainable due to the repeal of Section 65(105)(zzzzj). The demand for the period from 01.04.2008 to 30.09.2011 was also set aside on grounds of bonafide belief. The appellant is entitled to consequential relief, including refund of any amounts paid under protest.
What This Means For Similar Cases
Deemed Sales Exclude Service Tax
- Practitioners must now argue that any equipment rental where possession and control are transferred to the customer qualifies as a deemed sale under VAT/CST, not service tax.
- The burden shifts to the department to prove that control was retained, not the assessee to prove it was transferred.
- Invoices showing VAT/CST payment are now conclusive evidence of exclusion from service tax under the mutual exclusivity doctrine.
Repealed Provisions Cannot Be Revived
- Any service tax demand based on provisions repealed under the negative list regime (post 01.07.2012) is legally void, regardless of the nature of the transaction.
- Assessments relying on such provisions must be quashed at the first opportunity.
Bonafide Belief Shields from Extended Limitation
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Where the legal position on a tax issue was unsettled or consistently interpreted in favor of the assessee by tribunals, extended limitation periods cannot be invoked.
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Payment of an alternative tax (VAT) coupled with consistent accounting treatment strengthens the bonafide belief defense.
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Practitioners should document all contractual terms, CA certificates, and tribunal precedents to build a robust defense against dual taxation.
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Service tax assessments on equipment rentals must be challenged on the basis of control transfer, not merely on the presence of operators or maintenance clauses.
