Lease Rent When Vat Is Charged, Not Liable To Service Tax

A. PERCEPTIVE OF TERMING IT AS SALE

1. Article 366(29A)(c) of Constitution: Such delivery of goods on hire purchase or any system of payment on installment shall be deemed as “Sale of Goods”

2. Power to levy tax on sales is vested to State Governments under Entry 54 of List II and thus VAT has been charged accordingly

“- [54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of entry 92A of List I.]”

3. Trading of goods comes under ambit of Negative list. Section 66D(e). Therefore the deemed sales under Article 366(29A)(c) is not liable for service tax.

B. PERCEPTIVE OF TERMING IT AS LEASE

4. The transactions can be termed as lease based on the Accounting Principles

Definition of Operating Lease as per AS 19

• Lessor conveys to lessee
• In return for a payment or series of payment
• For an agreed period of time

1. Let us have a look at the list of “declared services” under Section 66E. Item (f) provides for the following:

“(f) transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods”

The first few expressions-hiring, leasing, licensing, etc-are intended to cover transactions of leases. But then the excluding expression-”without a transfer of right to use goods” would mean, wherever there is a transfer of right to use goods, the transaction will not be a declared service, and therefore, not a service. The idea of “declared services” is to explicitly include certain services and that explicit inclusion clause explicitly excludes a case where there is a transfer of right to use goods, the exclusion should be given effect to.

6. Doesn’t matter if operating lease or financial lease, given “right to use” has been transferred, service tax will not be liable to be paid. In case machines are not used by Contractor for use in their contract with vendors. Alternatively we can say, transferring the machinery, with the liberty to use the machine as per vendor’s own requirements. Thus it will constitute “Transfer of right to use” hence coming in exclusionary part of Section 66E(f) as highlighted above.

1. Only Activities “in relation to” such delivery shall be taxable 66E(g) such as . As regarding the interest element in Lease Rentals [Only on Financial Lease], the same shall attain Abatement of 90% as per Notification No. 26/2012-ST

C. Other relevant points in these regards

8. BEFORE NEGATIVE LIST REGIME

“Section 65 (105) “taxable service” means any [service provided or to be provided], – [(zzzzj) to any person, by any other person in relation tosupply of tangible goods including machinery, equipment and appliancesfor use, without transferring right of possession and effective control ofsuch machinery, equipment and appliances;]”

“Ministry’s letter [M.F. (D.R.) Letter D.O.F. No. 334/1/2008-TRU, dated 29-2-2008]

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 terms of the contract and other material facts. This could be ascertainable from the fact whether or not VAT is payable or paid”

9. In “20th Century Finance Corporation Ltd. [2000] 119 STC 182 : [2000] 6 SCC 12” it has been clearly defined the scope of service tax on these kinds of transactions.

The Constitution Bench of the apex court in 20th Century Finance Corporation Ltd. [2000] 119 STC 182 : [2000] 6 SCC 12, while dwelling on the controversy as regards the competence of the State Legislature to levy sales tax under Clause (29-A)(d) of Article 366 of the Constitution of India on the transfer of right to use any goods held that on a plain construction of Sub-clause (d) of Clause (29A), the taxable event is the transfer of right to use the goods regardless of when or whether the same are delivered for use. It held that the existence of the goods was essential so that they may be used and that a contract in respect thereof is executed. The locus of deemed sale is the place where the right to use them is transferred whether the goods are transferred and that the situs of the goods is of no relevance. It ruled that Article 366(29A)(d) envisages levy of tax on the transfer of the right to use goods and not on the use thereof. The apex court was categorical in declaring that the delivery of goods cannot constitute the basis for the levy of tax on the transfer of right to use the same.

10. WHEN TO BE TREATED AS SERVICE

“In Rashtriya Ispat Nigam Ltd. [1990] 77 STC 182 (AP), the petitioner for the purpose of its steel project allotted different works to contractors. To facilitate the execution of the works, the petitioner undertook to supply its machinery to the contractors for the purpose of being used there for which it (petitioner) realised charges. The provisional assessment levying tax on the hire charges under Section 5-E of the Andhra Pradesh General Sales Tax Act, 1957, was successfully challenged before the jurisdictional High Court. The statutory provision involved required that every dealer transferring the right to use goods for any purpose whatsoever for a period specified or otherwise to any lessee or licencee for cash, deferred payment or other valuable consideration in course of his business would be liable to pay tax at the prescribed rate on the amount realised or realisable by him on such transfer.While observing that the terms of contract in each case would determine whether there had been a transfer of the right to use or not, the same being a question of fact, the High Court concluded that on a close reading of all the contract conditions it was obvious that the contractor was entitled make use of the machinery only for purposes of execution of the works of the petitioner and that there was no transfer of right to use as such in favour of the contractor. The fact that the effective control of the machinery had remained with contractor was taken note of in arriving at this conclusion.”

Disclaimer: The author keeps a reservation of not lending his name in case of difference of opinion in any litigation matters. Thank You.

(Author Manish Sachdeva can be reached at manish619sachdeva@yahoo.in)

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