Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2026 Supreme(Online)(CESTAT) 1592

CUSTOMS EXCISE & SERVICE TAX APPELLATE TRIBUNAL
Dilip Gupta, President, P. V. Subba Rao, Technical Member
Gainwell Commosales Pvt. Ltd. – Appellant
Versus
Commissioner, Customs, Central Excise & Service Tax, Ghaziabad – Respondent
SERVICE TAX APPEAL NO. 70076 OF 2016 | SERVICE TAX APPEAL NO. 50642 OF 2014 | SERVICE TAX APPEAL NO. 50634 OF 2014

Advocates:
For the Appellants/Petitioners: B.L. Narasimhan, Sukriti Das, Ashutosh Chaudhary
For the Respondents: Santosh Kumar

A transaction involving the transfer of possession and effective control of tangible goods upon payment of VAT constitutes a ‘deemed sale’ and is not subject to service tax under the category of ‘supply of tangible goods for use’, as service tax and VAT are mutually exclusive.

Headnote:(A) Finance Act, 1994 - Sections 65(105)(zzzzj), 66E(f), 73, 75, 77, 78 - Constitution of India - Article 366(29A)(d) - Service tax - Supply of tangible goods for use - Transaction involving transfer of right to use goods - Whether renting of equipment constitutes taxable service or deemed sale - VAT paid on transaction indicates transfer of possession and effective control - Service tax and VAT are mutually exclusive - (Paras 15, 20, 22, 26, 29, 31)

(B) Interpretation of Statutes - Taxability - Principles for determining ‘transfer of right to use goods’ - Necessary attributes include availability of goods for delivery, consensus ad idem, legal right to use exclusive of transferor, and inability of owner to transfer same rights to others - Payment of VAT is a significant factor in determining nature of transaction. (Paras 28, 43, 44)

Facts of the case:
The appellant entered into agreements for renting out equipment to customers, where the appellant claimed the transactions involved transfer of effective control and possession, making them ‘deemed sales’ subject to VAT. The revenue authorities contended these were ‘supply of tangible goods’ services subject to service tax, alleging retention of control by the appellant and lack of transfer of effective possession.

Findings of Court:
The court observed that the agreement conditions, such as the customer's responsibility for operation, indemnity against losses, and restricted right of the appellant to use or withdraw the equipment, indicated a transfer of effective control and possession to the customer. Consequently, the transactions amounted to deemed sales under the constitutional framework, for which VAT was paid.

Issues: The main issues were whether the hiring of equipment constituted a taxable service under ‘supply of tangible goods for use’ or a ‘deemed sale’ under the constitutional definition of sales, and whether the payment of VAT excluded the levy of service tax.

Ratio Decidendi: A transaction involves a transfer of the right to use goods if possession and effective control are transferred to the hirer. Payment of VAT on such transactions serves as evidence of deemed sale, rendering service tax inapplicable. Service tax and VAT are mutually exclusive; where a transaction is taxed as a sale, service tax cannot be imposed on the same activity.

Result: Appeals allowed.

Table of Content
1. factual background involving classification dispute between service tax and vat for rental of equipment. (Para 1 , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 , 11 , 12 , 13 , 14)
2. criteria for distinguishing 'transfer of right to use' (deemed sale) from 'supply of tangible goods' service. (Para 15 , 16 , 17 , 18 , 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 29 , 30)
3. precedents establishing that transfer of effective control and payment of vat preclude service tax liability. (Para 31 , 32 , 33 , 34 , 35 , 36 , 37 , 38 , 39 , 40 , 41 , 42 , 43 , 44)
4. final determination that transaction qualifies as deemed sale, rendering service tax and penalties unsustainable. (Para 45 , 46 , 47 , 48)

JUSTICE DILIP GUPTA:

Gainwell Commosales Pvt. Ltd.^{11. the appellant}, earlier M/s. Tractors India Ltd., has filed Service Tax Appeal No. 50642 of 2014 for setting aside the order 27.09.2013 passed by the Commissioner, Customs, Central Excise and Service Tax, Ghaziabad^{22. the Commissioner} by which the demand of service has been confirmed under the proviso to section 73(1) of the Finance Act, 1994^{33. the Finance Act} against the taxable services of ‘supply of tangible goods for use’ under section 65(105)(zzzzj) of the Finance Act said to have been rendered by the appellant during the period from 28.05.2008 to 31.03.2010 with interest and penalty.

2. Service Tax Appeal No. 50634 of 2013 has been filed by the appellant to assail the same order 27.09.2013 passed by the Commissioner confirming the demand of service tax under section 73 of the Finance Act on the amount received against the taxable services of ‘supply of tangible goods for use’ rendered during the period from 01.04.2011 to 31.03.2012 with interest and penalty.

3. Service Tax Appeal No. 70076 of 2016 has been filed by the appellant to assail the order 17.08.2015 passed by the Commissioner confirming the demand of service tax upon the appellant under section 73 of the Finance Act on the taxable service of ‘supply of tangible goods for use’ for the period from April 2012 to September 2013 with interest and penalty.

4. The following chart gives details of the three Service Tax Appeals:

Appellant	50642/2014	50634/2014	70076/2016
Impugned Order date	27.09.2013	27.09.2013	17.08.2015
Show Cause Notice date	13.02.2012 (SCN-I)	13.02.2012 (SCN-I) 27.09.2012 (SCN-II)	23.04.2024 (SCN-III)
Period of Dispute	May 2008 to March 2010	April 2010 to March 2011 April 2011 to March 2012	April 2012 to September 2013
Service Tax demand	Rs. 1,76,29,875/-	Rs. 3,37,93,516/-	Rs. 4,02,31,518/-
Penalties	Rs. 1,76,29,875/- under section 78 of the Finance Act	Rs. 3,37,93,516/- under section 78 of the Finance Act	• Rs. 2,01,15,759/- (50% of tax demand) under section 78(1) of the Finance Act • Rs. 10,000 under section 77 of the Finance Act

5. The issue that arises for consideration in these three appeals is whether service tax under the category of ‘supply of tangible goods service’ is leviable on the appellant for renting various equipments such as diesel generating sets and earthmoving machinery given to customers. According to the appellant, the said equipments were given on rent with transfer of effective control and possession and VAT was paid on account of it being ‘deemed sales’, while according to the department effective control and possession was not transferred and so taxable service under ‘supply of tangible goods for use’ was provided by the appellant.

6. Tractor India was primarily engaged in the business of manufacturing and trading of various equipments such as diesel generator sets and earthmoving equipments. It was also registered under Uttar Pradesh Value Added Tax Act and Central Sales Tax Act for trading in equipments. Tractor India claims to have transferred the dealership business of caterpillar to its own subsidiary, Gainwell Commosales in the Financial Year 2010-2011 on 01.04.2010. Subsequently, Tractor India merged with Gainwell Commosales in terms of the order dated

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