Subleasing Of Containers; Deemed Sale , Service Tax Not Applicable ; Bombay High Court

The Bombay High Court has ruled that service tax would be applicable on transfer of goods only in cases where there is no "transfer of right to use" the said goods. The bench of Justices K. R. Shriram and A. S. Doctor ruled that in view of Article 366(29A)(d) of the Constitution of India, transfer of right to use goods is a deemed sale, which is subject to Sales Tax/VAT. The Court added that Article 366 (29A) of the Constitution does not distinguish between an owner or a lessor of the goods. Thus, the bench ruled that lease of goods for valuable consideration on a "transfer of right to use" basis is a deemed sale, even if the transferor is not the owner of the said goods. The Petitioner is the Liquidator of the Company - Swire Oilfield Services India Private Limited, which is in liquidation. Swire Oilfield was engaged in providing Cargo Carrying Units/ containers on rental basis to its customers. The said containers were not owned by the company but were taken on lease from another company vide a Lease Agreement. As per the said Lease Agreement, Swire Oilfield was permitted to sub-lease the containers to a third party. Thereafter, Swire Oilfield sub-leased the said containers on hire for consideration and entered into a lease agreement with the lessee- CU Inspection India Private Limited. Swire Oilfield discharged VAT at the rate of 12.5% on the lease rental/hire earned by it. During the course of verification of its Income Tax Return, the revenue authority opined that Swire Oilfield had failed to obtain service tax registration even after crossing the threshold limit of Rs.10 lakh. Further, it ruled that the company had failed to pay service tax on the sub-leasing of Cargo Carrying Units/ containers. Hence, the revenue authority held that the company had failed to pay service tax and obtain service tax registration with the sole intent to evade payment of service tax on the taxable services provided by it. Accordingly, a show cause notice was issued, seeking to recover service tax along with interest and penalty. The petitioner- Nayana Premji Savala, the liquidator of Swire Oilfield, in its reply to the said show cause notice submitted that the said containers were sub-leased on a "transfer of right to use" basis and there was a transfer of possession of the containers, which was a deemed sale under the Maharashtra Value Added Tax Act (MVAT Act). The petitioner argued that the company had discharged its liability to pay VAT on the transfer of right to use the said containers. However, the revenue authority passed an order against the Company- Swire Oilfield, demanding service tax on the sub-leasing of containers. Against this, the petitioner filed a writ petition before the Bombay High Court. The petitioner- Nayana Premji Savala, submitted before the High Court that as per Article 366 (29A)(d) of the Constitution of India, tax on sale or purchase of goods includes a tax on the transfer of the right to use any such goods for consideration. Further, it averred that the "transfer of right to use" goods for any purpose is included in the definition of sale under the MVAT Act and hence, the sub-leasing of containers by Swire Oilfield is a deemed sale transaction, which is subject to VAT. The petitioner argued that the term "service", which has been defined under Section 65B(44) of the Finance Act, 1994, excludes an activity which constitutes merely a transfer, delivery or supply of goods which is deemed sale within the meaning of Article 366(29A) of the Constitution. The revenue department contended that since the company- Swire Oilfield, is not the owner of the containers, therefore, it could not have effectively given control of or possession of the containers to the lessee. The revenue department added that since the company was not the rightful owner of the containers, it was not in a position to transfer effective control and a "right to use" to the lessee. It added that merely because the company was permitted to sub-lease the containers to a third party, the company cannot claim to be the owner of the containers. Thus, the revenue department argued that since there was no transfer of ownership, there cannot be any sale/deemed sale and hence, the said transaction would fall under the definition of taxable service. Therefore, it contended that service tax was payable by the company. The High Court noted that the company had transferred the right to use the containers to the lessee along with the possession and the effective control over the said containers, to the exclusion of the company. Thus, the Court ruled that the relationship between the company and the lessee did not fall under the definition of taxable service under Section 65 (105)(zzzzj) of the Finance Act, 1994. The bench added that Section 65 (105)(zzzzj) would apply only where a service is provided in relation to supply of tangible goods, without ...

Subleasing Of Containers; Deemed Sale , Service Tax Not Applicable ; Bombay High Court

Parina Katyal

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